Magna announces third quarter and year to date results
AURORA, ON, Nov. 4 /CNW/ - Magna International Inc. (TSX: MG.A; NYSE:
MGA) today reported financial results for the third quarter and nine months
ended September 30, 2008.
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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2008 2007 2008 2007
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Sales $ 5,533 $ 6,077 $ 18,868 $ 19,231
Operating (loss) income $ (112) $ 267 $ 493 $ 949
Net (loss) income $ (215) $ 155 $ 219 $ 635
Diluted (loss) earnings
per share $ (1.93) $ 1.38 $ 1.92 $ 5.69
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All results are reported in millions of U.S. dollars, except per share
figures, which are in U.S. dollars.
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THREE MONTHS ENDED SEPTEMBER 30, 2008
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We posted sales of $5.5 billion for the third quarter ended September 30,
2008, a decrease of 9% over the third quarter of 2007. This lower sales level
was a result of decreases in our North American production sales and complete
vehicle assembly sales, offset in part by increases in our European and Rest
of World production sales and our tooling, engineering and other sales.
During the third quarter of 2008, our North American average dollar
content per vehicle remained essentially unchanged while our European average
dollar content per vehicle increased by 10%, each compared to the third
quarter of 2007. In addition, North American and European vehicle production
declined 18% and 8%, respectively, each compared to the third quarter of 2007.
Complete vehicle assembly sales decreased 20% to $687 million for the
third quarter of 2008 compared to $859 million for the third quarter of 2007,
while complete vehicle assembly volumes declined 40% to 25,231 units compared
to the third quarter of 2007.
During the third quarter of 2008, operating loss was $112 million, net
loss was $215 million and diluted loss per share was $1.93, decreases of
$379 million, $370 million and $3.31, respectively, each compared to the third
quarter of 2007.
During the quarter ended September 30, 2008, we recorded a number of
unusual items, including impairment charges associated with long-lived assets
and future tax assets, restructuring charges, and a foreign currency gain. The
aggregate net charge for unusual items totalled $234 million. On a per share
basis, the aggregate net charge for unusual items totalled $2.10.
During the third quarter ended September 30, 2008, we generated cash from
operations of $285 million before changes in non cash operating assets and
liabilities, and invested $35 million in non cash operating assets and
liabilities. Total investment activities for the third quarter of 2008 were
$236 million, including $150 million in fixed asset additions, $4 million in
acquisition costs, and $82 million increase in other assets.
No shares were repurchased during the third quarter of 2008 pursuant to
the terms of our normal course issuer bid.
NINE MONTHS ENDED SEPTEMBER 30, 2008
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We posted sales of $18.9 billion for the nine months ended September 30,
2008, a decrease of 2% over the nine months ended September 30, 2007. This
lower sales level was a result of decreases in our North American production
sales and complete vehicle assembly sales, offset in part by increases in our
European and Rest of World production sales and our tooling, engineering and
other sales.
During the nine months ended September 30, 2008, North American and
European average dollar content per vehicle increased 2% and 18%,
respectively, each over the comparable nine-month period in 2007. During the
nine months ended September 30, 2008, North American and European vehicle
production declined 14% and 3%, respectively, each over the comparable
nine-month period in 2007.
Complete vehicle assembly sales decreased 7% to $2.827 billion for the
nine months ended September 30, 2008 compared to $3.027 billion for the nine
months ended September 30, 2007, while complete vehicle assembly volumes
declined 31% to 108,503 units compared to the first nine months of 2007.
During the nine months ended September 30, 2008, operating income was
$493 million, net income was $219 million and diluted earnings per share was
$1.92, decreases of $456 million, $416 million and $3.77, respectively, each
compared to the third quarter of 2007.
During the nine months ended September 30, 2008, we generated cash from
operations of $1.21 billion before changes in non cash operating assets and
liabilities, and invested $532 million in non cash operating assets and
liabilities. Total investment activities for the first nine months of 2008
were $770 million, including $465 million in fixed asset additions,
$109 million to purchase subsidiaries, and $196 million increase in
investments and other assets.
During the nine months ended September 30, 2008, we purchased for
cancellation 3.5 million Class A Subordinate Voting Shares for cash
consideration of $245 million, pursuant to terms of our normal course issuer
bid program.
A more detailed discussion of our consolidated financial results for the
third quarter and nine months ended September 30, 2008 is contained in the
Management's Discussion and Analysis of Results of Operations and Financial
Position and the unaudited interim consolidated financial statements and notes
thereto, which are attached to this Press Release.
Don Walker, Magna's co-CEO commented, "As a result of the extremely
challenging conditions of the automotive industry in North America, including
weakening automotive sales and vehicle production, it is necessary and prudent
that we undertake further restructuring actions. None the less, we continue to
invest in new technologies and programs with our customers for Magna's
long-term growth and profitability that will benefit our customers, employees
and shareholders in the years ahead."
DIVIDENDS
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Our Board of Directors yesterday declared a quarterly dividend with
respect to our outstanding Class A Subordinate Voting Shares and Class B
shares for the quarter ended September 30, 2008. The dividend of U.S.$0.18 per
share is payable on December 15, 2008 to shareholders of record on
November 28, 2008.
Vincent J. Galifi, our Executive Vice President and Chief Financial
Officer said, "During the third quarter, the auto industry downturn worsened
in North America and spread to Western Europe. These factors took their toll
on our third quarter financial results, and conditions are not expected to
improve meaningfully in the short term. Across Magna, we are reviewing all
uses of cash with an eye to maintaining our strong financial position in light
of the turmoil currently facing many automotive participants. Our Board's
decision to adjust our dividend as a result of our reduction in profitability
and uncertainty about the timing of an industry recovery in our traditional
markets reflects this view."
2008 OUTLOOK
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We have significantly reduced our expectations for 2008 light vehicle
production volumes in North America. For the full year 2008, we now expect
light vehicle production volumes of approximately 12.8 million units in North
America and approximately 14.9 million units in Europe. Consequently, we
expect consolidated sales to be between $23.2 billion and $24.3 billion for
full year 2008. Full year 2008 average dollar content per vehicle is expected
to be between $835 and $860 in North America and between $475 and $495 in
Europe. We expect full year 2008 complete vehicle assembly sales to be between
$3.25 billion and $3.45 billion.
In addition, we expect that full year 2008 spending for fixed assets will
be in the range of $700 million to $750 million.
In our 2008 outlook we have assumed no significant acquisitions or
divestitures, and no significant labour disruptions in our principal markets.
In addition, we have assumed that foreign exchange rates for the most common
currencies in which we conduct business relative to our U.S. dollar reporting
currency will approximate current rates.
We are the most diversified global automotive supplier. We design,
develop and manufacture technologically advanced automotive systems,
assemblies, modules and components, and engineer and assemble complete
vehicles, primarily for sale to original equipment manufacturers ("OEMs") of
cars and light trucks. Our capabilities include the design, engineering,
testing and manufacture of automotive interior systems; seating systems;
closure systems; body and chassis systems; vision systems; electronic systems;
exterior systems; powertrain systems; roof systems; as well as complete
vehicle engineering and assembly.
We have approximately 80,000 employees in 243 manufacturing operations
and 63 product development and engineering centres in 24 countries.
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We will hold a conference call for interested analysts and shareholders
to discuss our third quarter results on Tuesday, November 4, 2008 at
8:30 a.m. EST. The conference call will be chaired by Vincent J. Galifi,
Executive Vice-President and Chief Financial Officer. The number to use
for this call is 1-800-894-8917. The number for overseas callers is
1-212-231-2901. 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.
For further information, please contact Louis Tonelli, Vice-President,
Investor Relations at 905-726-7035.
For teleconferencing questions, please contact Karin Kaminski at
905-726-7103.
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FORWARD-LOOKING STATEMENTS
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The previous discussion may contain statements that, to the extent that
they are not recitations of historical fact, constitute "forward-looking
statements" within the meaning of applicable securities legislation.
Forward-looking statements may include financial and other projections, as
well as statements regarding our future plans, objectives or economic
performance, or the assumptions underlying any of the foregoing. We use words
such as "may", "would", "could", "will", "likely", "expect", "anticipate",
"believe", "intend", "plan", "forecast", "project", "estimate" and similar
expressions to identify forward-looking statements. Any such forward-looking
statements are based on assumptions and analyses made by us in light of our
experience and our perception of historical trends, current conditions and
expected future developments, as well as other factors we believe are
appropriate in the circumstances. However, whether actual results and
developments will conform with our expectations and predictions is subject to
a number of risks, assumptions and uncertainties. These risks, assumptions and
uncertainties include, without limitation, the impact of: shifting OEM market
shares; declining production volumes and changes in consumer demand for
vehicles; a reduction in the production volumes of certain vehicles, such as
certain light trucks; the termination or non-renewal by our customers of any
material contracts; our ability to offset increases in the cost of
commodities, such as steel and resins, as well as energy prices; fluctuations
in relative currency values; our ability to offset price concessions demanded
by our customers; our dependence on outsourcing by our customers; our ability
to compete with suppliers with operations in low cost countries; changes in
our mix of earnings between jurisdictions with lower tax rates and those with
higher tax rates, as well as our ability to fully benefit tax losses; other
potential tax exposures; the financial distress of some of our suppliers and
customers; the inability of our customers to meet their financial obligations
to us; our ability to fully recover pre-production expenses; warranty and
recall costs; product liability claims in excess of our insurance coverage;
expenses related to the restructuring and rationalization of some of our
operations; impairment charges; our ability to successfully identify, complete
and integrate acquisitions; risks associated with program launches; legal
claims against us; risks of conducting business in foreign countries including
Russia; the risk that the growth prospects expected to be realized in Russia
and other markets may not be fully realized, may take longer to realize than
expected or may not be realized at all; work stoppages and labour relations
disputes; changes in laws and governmental regulations; costs associated with
compliance with environmental laws and regulations; potential conflicts of
interest involving our indirect controlling shareholder, the Stronach Trust;
and other factors set out in our Annual Information Form filed with securities
commissions in Canada and our annual report on Form 40-F filed with the United
States Securities and Exchange Commission, and subsequent filings. In
evaluating forward-looking statements, readers should specifically consider
the various factors which could cause actual events or results to differ
materially from those indicated by such forward-looking statements. Unless
otherwise required by applicable securities laws, we do not intend, nor do we
undertake any obligation, to update or revise any forward-looking statements
to reflect subsequent information, events, results or circumstances or
otherwise.
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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
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MAGNA INTERNATIONAL INC.
Management's Discussion and Analysis of Results of Operations and
Financial Position
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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, 2008 included in this Press Release, and the audited
consolidated financial statements and MD&A for the year ended December 31,
2007 included in our 2007 Annual Report to Shareholders. The unaudited interim
consolidated financial statements for the three months and nine months ended
September 30, 2008 have been prepared in accordance with Canadian generally
accepted accounting principles ("GAAP") with respect to the preparation of
interim financial information and the audited consolidated financial
statements for the year ended December 31, 2007 have been prepared in
accordance with Canadian GAAP.
This MD&A has been prepared as at November 3, 2008.
OVERVIEW
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We are the most diversified global automotive supplier. We design,
develop and manufacture technologically advanced automotive systems,
assemblies, modules and components, and engineer and assemble complete
vehicles, primarily for sale to original equipment manufacturers ("OEMs") of
cars and light trucks. Our capabilities include the design, engineering,
testing and manufacture of automotive interior systems; seating systems;
closure systems; body and chassis systems; vision systems; electronic systems;
exterior systems; powertrain systems; roof systems; as well as complete
vehicle engineering and assembly. We follow a corporate policy of functional
and operational decentralization, pursuant to which we conduct our operations
through divisions, each of which is an autonomous business unit operating
within pre-determined guidelines. As at September 30, 2008, we had 243
manufacturing divisions and 63 product development and engineering centres in
24 countries.
Our operations are segmented on a geographic basis between North America,
Europe and Rest of World (primarily Asia, South America and Africa). A
Co-Chief Executive Officer heads management in each of our two primary
markets, North America and Europe. The role of the North American and European
management teams is to manage our interests to ensure a coordinated effort
across our different capabilities. In addition to maintaining key customer,
supplier and government contacts in their respective markets, our regional
management teams centrally manage key aspects of our operations while
permitting our divisions enough flexibility through our decentralized
structure to foster an entrepreneurial environment.
HIGHLIGHTS
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During the third quarter of 2008, we witnessed a significant decline in
North American vehicle production volumes due to a drop in consumer demand for
automobiles primarily as a result of:
- high oil prices;
- falling equity and home values;
- the global credit crisis and the lack of credit availability;
- higher unemployment;
- negative economic trends;
- falling consumer confidence; and
- related factors.
Conditions in the North American auto industry continued to be extremely
difficult. In the third quarter of 2008 U.S. vehicle sales continued to
weaken, and consequently North American auto production declined 18% from the
third quarter of 2007. In North America the Detroit 3 fared even worse with
vehicle production declining 25%. We also expect that fourth quarter vehicle
production in North America will be similar to the third quarter of 2007, with
anticipated production of approximately 3.0 million units, a decline of 19%
from the fourth quarter of 2007.
The economic woes and credit crisis that have impacted the North American
economy have spread globally. In Western Europe, the automotive outlook has
deteriorated rapidly, with declines in vehicle sales and vehicle production
volumes. Third quarter vehicle production declined 8% compared to the third
quarter of 2007, and we expect that fourth quarter vehicle production will be
approximately 3.2 million units, a decrease of 19% from the fourth quarter of
2007.
Based on these negative economic and other factors, during the third
quarter of 2008 we recorded long-lived asset impairment charges of
$258 million, related primarily to our powertrain, and interior and exterior
systems operations in the United States and Canada as discussed in the
"Unusual Items" section below. We also recorded a $123 million charge to
establish valuation allowances against all future tax assets in the United
States as discussed in the "Unusual Items" section below.
Due in part to the economic conditions in our traditional markets,
particularly North America, we have been consolidating, moving, closing and/or
selling operating facilities to improve our capacity utilization and
manufacturing footprint. During 2008, we have closed and/or sold facilities
and expect to close additional facilities in North America and Western Europe.
In addition, we have restructured a number of facilities to operate at
reduced capacity as a result of lower customer assembly volumes. Each
operating unit is currently reviewing all discretionary spending to lower
operating costs, and capital spending is being delayed, reduced or eliminated
to the extent possible. Despite these efforts, we expect to incur additional
restructuring and rationalization charges in the range of approximately
$70 million to $80 million related to activities that were initiated during
2008.
Over the past 15 years we have diversified our geographic sales and
manufacturing footprint to reduce our dependency on the North American market
for our consolidated sales and profits. We have succeeded in these efforts
largely as a result of diversification in Western Europe and we intend to
continue to grow our manufacturing presence in new markets, including Asia and
Eastern Europe, particularly in Russia. In the third quarter of 2008, Rest of
World production sales grew 43% compared to the third quarter of 2007.
Notwithstanding the above, our financial condition remains strong, with
net cash of $1.7 billion and unused committed credit facilities of
$1.9 billion at the end of the third quarter. We expect that this will help us
withstand the severe economic downturn we are currently facing and allow us to
continue investing for the future, including investments in innovation and
making selective acquisitions that improve or complement our core business. We
also believe our strong financial condition may enable us to win takeover
business from financially and operationally weaker suppliers in the market.
Finally, OJSC Russian Machines' ("Russian Machines") participation in the
arrangements it entered into with the Stronach Trust in connection with its
September 2007 strategic investment in Magna has terminated. Among other
things, Russian Machines no longer has any interest in the 20 million Class A
Subordinate Voting Shares purchased in 2007 nor any interest in M Unicar Inc.,
the holding company formed to hold the Magna shares of the Stronach Trust,
Russian Machines and certain members of Magna's management.
FINANCIAL RESULTS SUMMARY
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During the third quarter of 2008, we posted sales of $5.5 billion, a
decrease of 9% from the third quarter of 2007. This lower sales level was a
result of decreases in our North American production sales and complete
vehicle assembly sales, offset in part by increases in our European and Rest
of World production sales and tooling, engineering and other sales. Comparing
the third quarter of 2008 to the third quarter of 2007:
- North American average dollar content per vehicle remained
essentially unchanged, while vehicle production declined 18%;
- European average dollar content per vehicle increased 10%, while
vehicle production declined 8%; and
- Complete vehicle assembly sales decreased 20% to $687 million from
$859 million and complete vehicle assembly volumes declined 40%.
During the third quarter of 2008, we incurred an operating loss of
$112 million compared to operating income of $267 million for the third
quarter of 2007. Excluding the unusual items recorded in the third quarters of
2008 and 2007, as discussed in the "Unusual Items" section below, operating
income for the third quarter of 2008 decreased $210 million or 86%. The
decrease in operating income was primarily due to:
- decreased margins earned as a result of significantly lower
production volumes, in particular on many high content programs in
North America;
- an additional impairment of our investments in asset-backed
commercial paper ("ABCP"), as discussed in the "Cash Resources"
section below;
- accelerated amortization of deferred wage buydown assets at a
powertrain systems facility in the United States;
- increased commodity costs;
- decreased margins earned on lower volumes for certain assembly
programs;
- operational inefficiencies and other costs at certain facilities;
- downsizing costs primarily in North America;
- lower interest income; and
- incremental customer price concessions.
These factors were partially offset by:
- lower incentive compensation;
- an increase in reported U.S. dollar operating income due to the
strengthening of the euro and Canadian dollar, each against the
U.S. dollar;
- productivity improvements at certain divisions;
- additional margins earned on the launch of new programs during or
subsequent to the third quarter of 2007; and
- the benefit of restructuring activities during or subsequent to the
third quarter of 2007.
During the third quarter of 2008, we incurred a net loss of $215 million
compared to net income of $155 million for the third quarter of 2007.
Excluding the unusual items recorded in the third quarters of 2008 and 2007,
as discussed in the "Unusual Items" section below, net income for the third
quarter of 2008 decreased $151 million or 89%. The decrease in net income was
as a result of the decrease in operating income partially offset by lower
income taxes.
During the third quarter of 2008, our diluted loss per share was $1.93
compared to diluted earnings per share of $1.38 for the third quarter of 2007.
Excluding the unusual items recorded in the third quarters of 2008 and 2007,
as discussed in the "Unusual Items" section below, diluted earnings per share
for the third quarter of 2008 decreased $1.34 or 89%. The decrease in diluted
earnings per share is as a result of the decrease in net income offset in part
by a decrease in the weighted average number of diluted shares outstanding.
The decrease in the weighted average number of diluted shares outstanding was
primarily due to a reduction in the number of diluted shares associated with
stock options, debentures and restricted stock, since such shares were
anti-dilutive in the third quarter of 2008.
UNUSUAL ITEMS
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During the three months and nine months ended September 30, 2008 and 2007,
we recorded certain unusual items as follows:
2008 2007
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Diluted Diluted
Earnings Operat- Earnings
Operating Net per ing Net per
Income Income Share Income Income Share
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Third Quarter
Impairment
charges(1) $ (258) $ (223) $ (2.00) - - -
Restructuring
charges(1) (4) (4) (0.04) $ (8) $ (5) $ (0.05)
Foreign currency
gain(2) 116 116 1.04 7 7 0.06
Valuation
allowance on
future tax
assets(3) - (123) (1.10) - - -
Future tax
charge(3) - - - - (40) (0.35)
Sale of facility(4) - - - (12) (7) (0.06)
Sale of property(4) - - - 36 30 0.27
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Total third quarter
unusual items (146) (234) (2.10) 23 (15) (0.13)
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Second Quarter
Impairment
charges(1) $ (9) $ (7) $ (0.06) $ (22) $ (14) $ (0.12)
Restructuring
charges(1) - - - (14) (10) (0.09)
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Total second quarter
unusual items (9) (7) (0.06) (36) (24) (0.21)
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Total year to date
unusual items $ (155) $ (241) $ (2.11) $ (13) $ (39) $ (0.35)
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(1) Restructuring and Impairment Charges
During the first nine months of 2008 and 2007, we recorded impairment
charges as follows:
2008 2007
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Operating Net Operating Net
Income Income Income Income
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Third Quarter
North America $ 258 $ 223 $ - $ -
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Second Quarter
North America 5 3 22 14
Europe 4 4 - -
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Total second quarter
impairment charges 9 7 22 14
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Total year to date
impairment charges $ 267 $ 230 $ 22 $ 14
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(a) For the nine months ended September 30, 2008
Historically, we completed our annual goodwill and long-lived
asset impairment analyses in the fourth quarter of each year.
However, as a result of the significant and accelerated declines
in vehicle production volumes primarily in North America, we
reviewed goodwill and long-lived assets for impairment during the
third quarter of 2008.
As a result, during the third quarter of 2008 we recorded long-
lived asset impairment charges of $258 million, related primarily
to our powertrain, and interior and exterior systems operations
in the United States and Canada. At our powertrain operations,
particularly a facility in Syracuse, New York, asset impairment
charges of $186 million ($166 million after tax) were recorded
primarily as a result of the following factors:
- a dramatic market shift away from truck programs, in
particular four wheel drive pick-up trucks and SUVs;
- excess die-casting, machining and assembly capacity; and
- historical losses that are projected to continue throughout our
business planning period.
At our interiors and exteriors operations, we recorded
$65 million ($52 million after tax) of asset impairment charges
primarily as a result of the following factors:
- significantly lower volumes on certain pick-up truck and SUV
programs;
- the loss of certain replacement business;
- capacity utilization that is not sufficient to support the
current overhead structure; and
- historical losses that are projected to continue throughout our
business planning period.
During the second quarter of 2008, we recorded a $5 million asset
impairment related to specific assets at a seating systems
facility that supplied complete seats to Chrysler's minivan
facility in St. Louis. In Europe, we recorded a $4 million asset
impairment related to specific assets at an interior systems
facility that was disposed of during the third quarter of 2008.
In addition to the impairment charges recorded above, during the
third quarter of 2008 we incurred restructuring and
rationalization costs of $4 million related to the closure of our
seating systems facility in St. Louis.
(b) For the nine months ended September 30, 2007
During the second quarter of 2007, we recorded an asset
impairment of $22 million ($14 million after tax) relating to
specific assets at our powertrain facility in Syracuse, New York.
During the third quarter of 2007, we incurred restructuring and
rationalization charges of $8 million related to three facilities
in North America, and during the second quarter of 2007, we
incurred charges of $10 million related to two facilities in
North America and $4 million related to one facility in Europe
(2) Foreign Currency Gains
In the normal course of business, we review our cash investment and
tax planning strategies, including where such funds are invested. As
a result of these reviews, during the third quarters of 2008 and 2007
we repatriated funds from Europe and as a result recorded foreign
currency gains of $116 million and $7 million, respectively.
(3) Income Taxes
(a) For the nine months ended September 30, 2008
During the third quarter of 2008, we recorded a $123 million
charge to establish valuation allowances against all of our
future tax assets in the United States.
Accounting standards require that we assess whether valuation
allowances should be established against our future income tax
assets based on the consideration of all available evidence using
a "more likely than not" standard. The factors we use to assess
the likelihood of realization are our past history of earnings,
forecast of future taxable income, and available tax planning
strategies that could be implemented to realize the future tax
assets. The valuation allowances were required in the United
States based on:
- historical consolidated losses at our U.S. operations that are
expected to continue in the near-term;
- the accelerated deterioration of near-term automotive market
conditions in the United States; and
- significant and inherent uncertainty as to the timing of when
we would be able to generate the necessary level of earnings to
recover these future tax assets.
(b) For the nine months ended September 30, 2007
During 2007, we recorded a $40 million charge to future income
tax expense as a result of an alternative minimum tax that was
introduced in Mexico.
(4) Other Unusual Items
During the third quarter of 2007, we entered into an agreement to
sell one underperforming exterior systems facility in Europe and as a
result, we incurred a loss on disposition of the facility of
$12 million. Also during the third quarter of 2007, we disposed of
land and building in the United Kingdom and recorded a gain on
disposal of $36 million.
INDUSTRY TRENDS AND RISKS
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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 their various vehicle 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, credit availability, energy and fuel prices, international
conflicts, labour relations issues, regulatory requirements, trade agreements,
infrastructure considerations, legislative changes, and environmental
emissions standards and safety issues. A number of other economic, industry
and risk factors discussed in our Annual Information Form and Annual Report on
Form 40-F, each in respect of the year ended December 31, 2007, also affect
our success, including such things as relative currency values, commodities
prices, price reduction pressures from our customers, the financial condition
of our customers and our supply base and competition from manufacturers with
operations in low cost countries.
The economic, industry and risk factors discussed in our Annual
Information Form and Annual Report on Form 40-F, each in respect of the year
ended December 31, 2007, remain substantially unchanged in respect of the
third quarter ended September 30, 2008, except that:
- consumer demand for automobiles in our traditional markets has
dropped more rapidly than anticipated as a result of negative
economic trends, the global credit crisis and related factors;
- production volumes of our largest North American and European
customers have fallen more rapidly than previously anticipated and
these volume reductions are expected to negatively impact our results
for the remainder of 2008 and all of 2009;
- the financial condition of several of our largest customers appears
to be deteriorating more quickly than anticipated due to the impact
of negative economic and industry trends as well as credit ratings
downgrades and the overall impact of the credit crisis. As the
financial condition of our customers deteriorates, we face
intensified credit risks, which could adversely impact our
profitability and financial condition;
- prices of some steels, resins, paints/chemicals and other raw
materials and commodities have recently moderated, as have oil and
gas prices;
- our financial results in recent quarters benefitted from the
increasing relative values of the euro, British pound and Canadian
dollar in relation to the U.S. dollar in which we report our results.
Subsequent to quarter end, these currencies have declined
significantly in value relative to the U.S. dollar, which could
impact our profitability and financial condition; and
- while we continue to have positive relations with Russian Machines
and its affiliates, including the GAZ Group which is Russia's second
largest automobile manufacturer, it is too early to determine whether
Russian Machines' exit from the arrangements with the Stronach Trust
will have any impact on our ability to execute our growth strategy in
Russia.
RESULTS OF OPERATIONS
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Average Foreign Exchange
For the three months For the nine months
ended September 30, ended September 30,
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2008 2007 Change 2008 2007 Change
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1 Canadian dollar equals
U.S. dollars 0.960 0.957 - 0.982 0.908 + 8%
1 euro equals U.S. dollars 1.501 1.374 + 9% 1.521 1.345 + 13%
1 British pound equals
U.S. dollars 1.890 2.020 - 7% 1.946 1.987 - 2%
-------------------------------------------------------------------------
The preceding table reflects the average foreign exchange rates between
the most common currencies in which we conduct business and our U.S. dollar
reporting currency. The changes in these foreign exchange rates for the three
months and nine months ended September 30, 2008 impacted the reported
U.S. dollar amounts of our sales, expenses and income.
The results of operations whose functional currency is not the
U.S. dollar are translated into U.S. dollars using the average exchange rates
in the table above for the relevant period. Throughout this MD&A, reference is
made to the impact of translation of foreign operations on reported U.S.
dollar amounts where relevant.
Our results can also be affected by the impact of movements in exchange
rates on foreign currency transactions (such as raw material purchases or
sales denominated in foreign currencies). However, as a result of hedging
programs employed by us, primarily in Canada, foreign currency transactions in
the current period have not been fully impacted by movements in exchange
rates. We record foreign currency transactions at the hedged rate where
applicable.
Finally, holding gains and losses on foreign currency denominated
monetary items, which are recorded in selling, general and administrative
expenses, impacts reported results.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
-------------------------------------------------------------------------
Sales
For the three months
ended September 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
Vehicle Production Volumes (millions of units)
North America 2.917 3.558 - 18%
Europe 3.229 3.499 - 8%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 860 $ 862 -
Europe $ 528 $ 479 + 10%
-------------------------------------------------------------------------
Sales
External Production
North America $ 2,510 $ 3,068 - 18%
Europe 1,706 1,675 + 2%
Rest of World 143 100 + 43%
Complete Vehicle Assembly 687 859 - 20%
Tooling, Engineering and Other 487 375 + 30%
-------------------------------------------------------------------------
Total Sales $ 5,533 $ 6,077 - 9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
External Production Sales - North America
External production sales in North America decreased 18% or $558 million
to $2.5 billion for the third quarter of 2008 compared to $3.1 billion for the
third quarter of 2007. This decrease in production sales reflects an 18%
decrease in North American vehicle production volumes and a slight decline in
our North American average dollar content per vehicle. More importantly,
during the third quarter of 2008 our largest customers in North America
continued to reduce vehicle production volumes compared to the third quarter
of 2007. While North American vehicle production volumes declined 18% in the
third quarter of 2008 compared to the third quarter of 2007, Ford and Chrysler
vehicle production declined 33% and 32%, respectively.
Our average dollar content per vehicle declined to $860 for the third
quarter of 2008 compared to $862 for the third quarter of 2007, primarily as a
result of:
- the impact of lower production and/or content on certain programs,
including:
- GM's full-size pickups and SUVs;
- the Ford F-Series SuperDuty;
- the Ford Edge and Lincoln MKX;
- the Dodge Nitro;
- the Ford Expedition and Lincoln Navigator;
- the Chevrolet Equinox, Pontiac Torrent and Suzuki XL7; and
- the Ford Explorer and Mercury Mountaineer;
- lower Dodge Ram and Ford F-Series production volumes in part as a
result of the change-over to the next generation of vehicles in the
third quarter of 2008 and the related ramp-up period;
- programs that ended production during or subsequent to the third
quarter of 2007, including the Chrysler Pacifica; and
- incremental customer price concessions.
These factors were partially offset by:
- the launch of new programs during or subsequent to the third quarter
of 2007, including:
- the Ford Flex;
- the Dodge Journey;
- the Mazda 6;
- the Dodge Grand Caravan, Chrysler Town & Country and Volkswagen
Routan;
- the Chevrolet Malibu; and
- the Cadillac CTS;
- acquisitions completed subsequent to the third quarter of 2007,
including:
- a substantial portion of Plastech Engineered Products Inc.'s
("Plastech") exteriors business; and
- a stamping and sub-assembly facility in Birmingham, Alabama from
Ogihara America Corporation ("Ogihara") and
- increased production and/or content on certain programs, including:
- the Saturn Outlook, Buick Enclave and GMC Acadia; and
- the Chevrolet Cobalt and Pontiac Pursuit.
External Production Sales - Europe
External production sales in Europe increased 2% or $31 million to
$1.706 billion for the third quarter of 2008 compared to $1.675 billion for
the third quarter of 2007. This increase in production sales reflects a 10%
increase in our European average dollar content per vehicle partially offset
by an 8% decrease in European vehicle production volumes for the third quarter
of 2008, each as compared to the third quarter of 2007.
Our average dollar content per vehicle grew by 10% or $49 to $528 for the
third quarter of 2008 compared to $479 for the third quarter of 2007,
primarily as a result of:
- an increase in reported U.S. dollar sales due to the strengthening of
the euro against the U.S. dollar;
- increased production and/or content on certain programs, including:
- the MINI Clubman; and
- the smart fortwo; and
- the launch of new programs during or subsequent to the third quarter
of 2007, including;
- the Volkswagen Tiguan;
- the Jaguar XF; and
- the Audi Q5.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including the BMW X3;
- the sale of certain facilities during or subsequent to the third
quarter of 2007;
- programs that ended production during or subsequent to the third
quarter of 2007, including the Chrysler Voyager; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in Rest of World increased 43% or $43 million to
$143 million for the third quarter of 2008 compared to $100 million for the
third quarter of 2007. The increase in production sales is primarily as a
result of:
- the launch of new programs during or subsequent to the third quarter
of 2007 in South Africa, Korea and China;
- increased production and/or content on certain programs in China and
Brazil; and
- an increase in reported U.S. dollar sales as a result of the
strengthening of the Brazilian real and Chinese Renminbi, each
against the U.S. dollar.
These factors were partially offset by a decrease in reported U.S. dollar
sales as a result of the weakening of the Korean Won against the U.S. dollar.
Complete Vehicle Assembly Sales
The terms of our various vehicle assembly contracts differ with respect
to the ownership of components and supplies related to the assembly process
and the method of determining the selling price to the OEM customer. Under
certain contracts we are acting as principal, and purchased components and
systems in assembled vehicles are included in our inventory and cost of sales.
These costs are reflected on a full cost basis in the selling price of the
final assembled vehicle to the OEM customer. Other contracts provide that
third party components and systems are held on consignment by us, and the
selling price to the OEM customer reflects a value added assembly fee only.
Production levels of the various vehicles assembled by us have an impact
on the level of our sales and profitability. In addition, the relative
proportion of programs accounted for on a full cost basis and programs
accounted for on a value added basis, also impacts our level of sales and
operating margin percentage, but may not necessarily affect our overall level
of profitability. Assuming no change in total vehicles assembled, a relative
increase in the assembly of vehicles accounted for on a full cost basis has
the effect of increasing the level of total sales, however, because purchased
components are included in cost of sales, profitability as a percentage of
total sales is reduced. Conversely, a relative increase in the assembly of
vehicles accounted for on a value added basis has the effect of reducing the
level of total sales and increasing profitability as a percentage of total
sales.
For the three months
ended September 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales $ 687 $ 859 - 20%
-------------------------------------------------------------------------
Complete Vehicle Assembly Volumes (Units)
Full-Costed:
BMW X3, Mercedes-Benz G-Class, and
Saab 9(3) Convertible 18,974 27,542 - 31%
Value-Added:
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep Commander 6,257 14,413 - 57%
-------------------------------------------------------------------------
25,231 41,955 - 40%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Complete vehicle assembly sales decreased 20% or $172 million to
$687 million for the third quarter of 2008 compared to $859 million for the
third quarter of 2007 while assembly volumes decreased 40% or 16,724 units.
The decrease in complete vehicle assembly sales was primarily as a result of:
- a decrease in assembly volumes for the BMW X3, Saab 9(3) Convertible,
Chrysler 300, Jeep Commander and Grand Cherokee; and
- the end of production of the Chrysler Voyager at our Graz assembly
facility in the fourth quarter of 2007.
These factors were partially offset by:
- an increase in reported U.S. dollar sales due to the strengthening of
the euro against the U.S. dollar; and
- higher assembly volumes for the Mercedes-Benz G-Class.
Tooling, Engineering and Other
Tooling, engineering and other sales increased 30% or $112 million to $487
million for the third quarter of 2008 compared to $375 million for the third
quarter of 2007.
In the third quarter of 2008 the major programs for which we recorded
tooling, engineering and other sales were:
- the Lincoln MKS;
- the Cadillac BRX and Saab 9-4X;
- the Mercedes-Benz M-Class;
- the Mazda 6;
- the BMW Z4;
- the Dodge Ram; and
- the Opel Insignia.
In the third quarter of 2007, the major programs for which we recorded
tooling, engineering and other sales were:
- the Ford F-Series SuperDuty;
- the Audi A4;
- the Dodge Grand Caravan and Chrysler Town & Country;
- GM's full-size pickups; and
- the Ford Flex.
In addition, tooling, engineering and other sales benefited from the
strengthening of the euro against the U.S. dollar.
Gross Margin
Gross margin decreased 25% or $198 million to $600 million for the third
quarter of 2008 compared to $798 million for the third quarter of 2007 and
gross margin as a percentage of total sales decreased to 10.8% compared to
13.1%. The unusual items discussed previously in the "Unusual Items" section
negatively impacted gross margin as a percent of total sales by 0.1% in both
the third quarter of 2008 and 2007. Excluding these unusual items, the 2.3%
decrease in gross margin as a percentage of total sales was primarily as a
result of:
- lower gross margin earned as a result of a significant decrease in
production volumes, in particular on many high content programs in
North America;
- accelerated amortization of deferred wage buydown assets at a
powertrain systems facility in the United States;
- operational inefficiencies and other costs at certain facilities, in
particular at certain powertrain and exterior systems facilities in
North America;
- costs incurred in preparation for upcoming launches;
- an increase in tooling and other sales that earn low or no margins;
- increased commodity costs; and
- incremental customer price concessions.
These factors were partially offset by:
- the decrease in complete vehicle assembly sales which has a lower
gross margin than our consolidated average;
- productivity and efficiency improvements at certain facilities;
- lower employee profit sharing; and
- the benefit of restructuring activities during or subsequent to the
third quarter of 2007.
Depreciation and Amortization
Depreciation and amortization costs decreased 1% or $3 million to
$217 million for the third quarter of 2008 compared to $220 million for the
third quarter of 2007. Excluding the unusual items discussed previously in the
"Unusual Items" section, depreciation and amortization remained unchanged at
$217 million. Depreciation and amortization increased due to the strengthening
of the euro against the U.S. dollar for the third quarter of 2008 compared to
the third quarter of 2007. Excluding the effect of foreign exchange,
depreciation and amortization decreased primarily as a result of:
- the sale or disposition of certain facilities subsequent to the third
quarter of 2007; and
- the write-down of certain assets during or subsequent to the third
quarter of 2007.
These factors were partially offset by:
- acquisitions completed subsequent to the third quarter of 2007
including:
- the Ogihara acquisition; and
- the acquisition of a substantial portion of Plastech's exteriors
business.
Selling, General and Administrative ("SG&A")
SG&A expenses as a percentage of sales decreased to 4.6% for the third
quarter of 2008 compared to 5.4% for the third quarter of 2007. SG&A expenses
decreased 23% or $77 million to $253 million for the third quarter of 2008
compared to $330 million for the third quarter of 2007. Excluding the unusual
items discussed previously in the "Unusual Items" section, SG&A expenses
increased by $9 million primarily as a result of:
- net foreign exchange losses incurred during the third quarter of 2008
compared to net foreign exchange gains recorded in the third quarter
of 2007;
- a $24 million write-down of our investments in ABCP as discussed in
the "Cash Resources" section below, compared to a $7 million write-
down in the third quarter or 2007;
- an increase in reported U.S. dollar SG&A due to the strengthening of
the euro against the U.S. dollar;
- higher infrastructure costs related to programs that launched during
or subsequent to the third quarter of 2007; and
- higher infrastructure costs related the acquisition of Ogihara.
These factors were partially offset by:
- lower incentive compensation;
- lower employee profit sharing;
- reduced spending at certain facilities; and
- the sale or disposition of certain facilities during or subsequent to
the third quarter of 2007.
Earnings before Interest and Taxes ("EBIT")(1)
For the three months
ended September 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
North America $ (303) $ 165 - 284%
Europe 52 84 - 38%
Rest of World 9 2 + 350%
Corporate and Other 116 (3) -
-------------------------------------------------------------------------
Total EBIT $ (126) $ 248 - 151%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in EBIT for the third quarters of 2008 and 2007 were the
following unusual items, which have been discussed previously in the "Unusual
Items" section.
For the three months
ended September 30,
---------------------
2008 2007
-------------------------------------------------------------------------
North America
Impairment charges $ (258) $ -
Restructuring charges (4) (8)
-------------------------------------------------------------------------
(262) (8)
-------------------------------------------------------------------------
Europe
Sale of facility - (12)
Sale of property - 36
-------------------------------------------------------------------------
- 24
-------------------------------------------------------------------------
Corporate and Other
Foreign currency gain 116 7
-------------------------------------------------------------------------
$ (146) $ 23
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 284% or $468 million to a loss of
$303 million for the third quarter of 2008 compared to earnings of
$165 million for the third quarter of 2007. Excluding the North American
unusual items discussed previously in the "Unusual Items" section, the
$214 million decrease in EBIT was primarily as a result of:
- lower earnings as a result of a significant decrease in production
volumes, in particular on many high content programs;
- accelerated amortization of deferred wage buydown assets at a
powertrain systems facility in the United States;
- operational inefficiencies and other costs at certain facilities, in
particular at certain exterior, interior and powertrain systems
facilities;
- net foreign exchange losses incurred during the third quarter of 2008
compared to net foreign exchange gains recorded in the third quarter
of 2007;
- increased commodity costs;
- increased downsizing costs; and
- incremental customer price concessions.
These factors were partially offset by:
- productivity and efficiency improvements at certain facilities;
- lower incentive compensation;
- lower employee profit sharing;
- lower affiliation fees paid to corporate;
- incremental margin earned from the acquisition of Ogihara; and
- the benefit of restructuring activities during or subsequent to the
third quarter of 2007.
Europe
EBIT in Europe decreased 38% or $32 million to $52 million for the third
quarter of 2008 compared to $84 million for the third quarter of 2007.
Excluding the European unusual items discussed previously in the "Unusual
Items" section, the $8 million decrease in EBIT primarily as a result of:
- lower margins earned as a result of a decrease in vehicle production
volumes for certain programs including the end of production of the
Chrysler Voyager at our Graz assembly facility in the fourth quarter
of 2007;
- operational inefficiencies and other costs at certain facilities;
- costs incurred in preparation for upcoming launches or for programs
that have not fully ramped up production;
- costs incurred to develop and grow our electronics capabilities; and
- incremental customer price concessions.
These factors were partially offset by:
- the benefit of restructuring activities during or subsequent to the
third quarter of 2007;
- productivity and efficiency improvements at certain facilities, in
particular at certain interior systems facilities;
- lower employee profit sharing;
- an increase in reported U.S. dollar EBIT as a result of the
strengthening of the euro against the U.S. dollar; and
- increased margins earned on production programs that launched during
or subsequent to the third quarter of 2007.
Rest of World
Rest of World EBIT increased $7 million to $9 million for the third
quarter of 2008. The increase in EBIT was primarily as a result of:
- incremental margin earned on the increase in production sales
discussed above; and
- productivity and efficiency improvements at certain facilities,
primarily in China.
These factors were partially offset by costs incurred at other new
facilities, primarily in China, as we continue to pursue opportunities in this
growing market.
Corporate and Other
Corporate and Other EBIT increased $119 million to $116 million for the
third quarter of 2008 compared to a loss of $3 million for the third quarter
of 2007. Excluding the Corporate and Other unusual items discussed previously
in the "Unusual Items" section, the $10 million increase in EBIT was primarily
as a result of:
- lower incentive compensation; and
- decreased consulting fees.
These factors were partially offset by:
- the additional $24 million (Q3 2007 - $7 million) write-down of our
investment in ABCP as discussed in the "Cash Resources" section
below; and
- lower affiliation fees earned from our divisions.
Interest Income, Net
Net interest income decreased $5 million to $14 million for the third
quarter of 2008 compared to $19 million for the third quarter of 2007. The
decrease in net interest income was primarily as a result of an increase in
interest expense on short term borrowing partially offset by a reduction in
interest expense on long-term debt due to the repayment in January 2008 of the
fourth series of our senior unsecured notes related to the acquisition of New
Venture Gear ("NVG").
Operating Income
For the third quarter of 2008, we incurred an operating loss of
$112 million compared to operating income of $267 million for the third
quarter of 2007. Excluding the unusual items discussed previously in the
"Unusual Items" section, operating income for the third quarter of 2008
decreased 86% or $210 million. This decrease in operating income was the
result of the decrease in EBIT (excluding unusual items) combined with the
decrease in net interest income earned, both as discussed above.
Income Taxes
Our effective income tax rate on operating income (excluding equity
income) for the third quarters of 2008 and 2007 were significantly impacted by
the unusual items discussed previously in the "Unusual Items" section.
Excluding unusual items, our effective income tax rate increased to 46.9% for
the third quarter of 2008 compared to 30.3% in the third quarter of 2007. The
higher effective income tax rate in 2008 was primarily due to losses and other
items not benefited for tax, partially offset by a change in mix of earnings,
whereby proportionately more income was earned in jurisdictions with lower
income tax rates.
Net Income
For the third quarter of 2008, we incurred a net loss of $215 million
compared to net income of $155 million for the third quarter of 2007.
Excluding the unusual items discussed previously in the "Unusual Items"
section, net income decreased 89% or $151 million as a result of the decrease
in operating income (excluding unusual items), partially offset by lower
income taxes (excluding unusual items), all as discussed above.
Earnings per Share
For the three months
ended September 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
(Loss) earnings per Class A Subordinate
Voting or Class B Share
Basic $ (1.93) $ 1.40 N/A
Diluted $ (1.93) $ 1.38 N/A
-------------------------------------------------------------------------
Average number of Class A Subordinate
Voting and Class B Shares outstanding
(millions)
Basic 111.6 110.5 + 1%
Diluted 111.6 113.1 - 1%
-------------------------------------------------------------------------
For the third quarter of 2008 we lost $1.93 per share compared to diluted
earnings per share of $1.38 for the third quarter of 2007. Excluding the
unusual items discussed previously in the "Unusual Items" section, diluted
earnings per share decreased $1.34 from the third quarter of 2007 to the third
quarter of 2008 as a result of the decrease in net income (excluding unusual
items) described above, partially offset by a decrease in the weighted average
number of diluted shares outstanding.
The decrease in the weighted average number of diluted shares outstanding
was primarily due to a reduction in the number of diluted shares associated
with stock options, debentures and restricted stock, since such shares were
anti-dilutive in the third quarter of 2008.
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 2008 was negative 7.1%, compared to a
positive return of 14.7% for the third quarter of 2007. The unusual items
discussed previously in the "Unusual Items" section negatively impacted ROFE
in the third quarter of 2008 by 8.2% and positively impacted ROFE by 1.3% in
the third quarter of 2007.
Excluding these unusual items, the 12.3% decrease in ROFE was as a result
of the decrease in EBIT, as described above, combined with a $340 million
increase in average funds employed for the third quarter of 2008 compared to
the third quarter of 2007. The increase in our average funds employed was
primarily as a result of:
- an increase in our average investment in working capital;
- the strengthening of the euro against the U.S. dollar; and
- an increase in our long-term investments due to the reclassification
of ABCP as discussed in the "Cash Resources" section below.
-------------------------------------------------------------------------
(1) ROFE is defined as EBIT divided by the average funds employed for the
period. Funds employed is defined as long-term assets, excluding
future tax assets, plus non-cash operating assets and liabilities.
Non-cash operating assets and liabilities are defined as the sum of
accounts receivable, inventory, income taxes recoverable and prepaid
assets less the sum of accounts payable, accrued salaries and wages,
other accrued liabilities, income taxes payable and deferred
revenues.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
-------------------------------------------------------------------------
Cash Flow from Operations
For the three months
ended September 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
Net (loss) income $ (215) $ 155
Items not involving current cash flows 490 185
-------------------------------------------------------------------------
275 340 $ (65)
Changes in non-cash operating assets
and liabilities (25) (123)
-------------------------------------------------------------------------
Cash provided from operating activities $ 250 $ 217 $ 33
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flow from operations before changes in non-cash operating assets and
liabilities decreased $65 million to $275 million for the third quarter of
2008 compared to $340 million for the third quarter of 2007. The decrease in
cash flow from operations was due to a $370 million decrease in net income (as
discussed above) partially offset by a $305 million increase in items not
involving current cash flows. Items not involving current cash flows are
comprised of the following:
For the three months
ended September 30,
----------------------
2008 2007
-------------------------------------------------------------------------
Long-lived asset impairments $ 258 $ -
Valuation allowance established against
future tax assets 123 -
Depreciation and amortization 217 220
Future income taxes and non-cash portion of
current taxes (77) (30)
Equity income (2) -
Other non-cash charges (29) (5)
-------------------------------------------------------------------------
Items not involving current cash flows $ 490 $ 185
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The $47 million change in future income taxes and non-cash portion of
current taxes is due to the income tax impact of the long-lived asset
impairments and the resulting timing difference between tax and book values of
net assets and reserves.
Cash invested in non-cash operating assets and liabilities amounted to
$25 million for the third quarter of 2008 compared to $123 million for the
third quarter of 2007. 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,
----------------------
2008 2007
-------------------------------------------------------------------------
Accounts receivable $ 345 $ 9
Inventory (48) (93)
Prepaid expenses and other (8) -
Accounts payable and other accrued liabilities (276) (56)
Income taxes payable (31) 22
Deferred revenue (7) (5)
-------------------------------------------------------------------------
Changes in non-cash operating assets
and liabilities $ (25) $ (123)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The decrease in accounts receivable in the third quarter of 2008 was
primarily due to a decrease in production receivables related to lower sales
volumes in both North America and Europe compared to the second quarter of
2008. The decrease in accounts payable and other accrued liabilities was due
to lower purchases related to lower volumes and the timing of payments to
suppliers. The decrease in income taxes payable was primarily due to the
amount of income tax instalments.
Capital and Investment Spending
For the three months
ended September 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
Fixed assets $ (150) $ (174)
Investments and other assets (82) (145)
-------------------------------------------------------------------------
Fixed assets, investments
and other assets additions (232) (319)
Purchase of subsidiaries (4) -
Proceeds from disposals 31 76
-------------------------------------------------------------------------
Cash used in investing activities $ (205) $ (243) $ 38
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, investments and other assets additions
In the third quarter of 2008, we invested $150 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 2008 was for manufacturing equipment
for programs that launched during the third quarter of 2008 or will be
launching subsequent to the third quarter of 2008.
In the third quarter of 2008, we invested $82 million in other assets
related primarily to fully reimbursable planning and engineering costs for
programs that will be launching during or subsequent to 2008. The increase in
investments and other assets for the third quarter of 2007, relates primarily
to a $130 million investment in ABCP as discussed in the "Cash Resources"
section below.
Proceeds from disposition
Proceeds from disposal in the third quarter of 2008 were $31 million
which represent normal course fixed and other asset disposals. For the third
quarter of 2007, proceeds from disposal reflect the proceeds received on the
sale of property, as discussed previously in the "Unusual Items" section and
normal course fixed and other asset disposals.
Financing
For the three months
ended September 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
Repayments of debt $ (35) $ (53)
Issues of debt - 3
Issues of Class A Subordinate Voting Shares - 1,537
Repurchase of Class A Subordinate
Voting Shares - (1,091)
Repurchase of Class B Shares - (24)
Cash dividends paid (40) (42)
-------------------------------------------------------------------------
Cash (used in) provided from financing
activities $ (75) $ 330 $ (405)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The repayments of debt in the third quarter of 2008 include the repayment
of government debt in Europe.
During the third quarter of 2007, we issued 20.0 million Class A
Subordinate Voting Shares for cash proceeds of $1.531 billion (net of issue
costs of $6 million) in connection with the Arrangement. We also purchased for
cancellation 11.9 million Class A Subordinate Voting Shares for an aggregate
purchase price of $1.091 billion (including transaction costs of $2 million)
and 0.2 million Class B Shares for an aggregate purchase price of $24 million.
Each of these transactions is discussed in more detail in the "Capital
transactions" section of our 2007 Annual Report to Shareholders.
Cash dividends paid per Class A Subordinate Voting or Class B Share were
$0.36 in the third quarters of 2008 and 2007.
Financing Resources
Capitalization
As at As at
September December
30, 2008 31, 2007 Change
-------------------------------------------------------------------------
Liabilities
Bank indebtedness $ 73 $ 89
Long-term debt due within one year 442 374
Long-term debt 170 337
-------------------------------------------------------------------------
685 800
Shareholders' equity 8,196 8,642
-------------------------------------------------------------------------
Total capitalization $ 8,881 $ 9,442 $ (561)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total capitalization decreased by $561 million to $8.88 billion at
September 30, 2008 as compared to $9.44 billion at December 31, 2007. The
decrease in capitalization was a result of decreases in shareholders' equity
and liabilities of $446 million and $115 million, respectively.
The decrease in liabilities is primarily as a result of the repayment of
the fourth series of our senior unsecured notes related to the NVG acquisition
and government debt in Europe.
The decrease in shareholders' equity was primarily as a result of:
- a $178 million decrease in accumulated net unrealized gains on
translation of net investment in foreign operations, primarily as a
result of the weakening of the Canadian dollar and euro, each against
the U.S. dollar between December 31, 2007 and September 30, 2008 and
a $116 million gain that was realized in net income on the
repatriation of funds from Europe;
- the purchase for cancellation of Class A Subordinate Voting Shares in
connection with the NCIB; and
- dividends paid during the first nine months of 2008.
These factors were partially offset by net income earned during the first
nine months of 2008 (as discussed above).
Cash Resources
During the first nine months of 2008, our cash resources decreased by
$557 million to $2.4 billion as a result of the cash used in investing
activities and financing activities partially offset by the cash provided from
operating activities, all as discussed above. In addition to our cash
resources, we had term and operating lines of credit totalling $2.1 billion,
of which $1.9 billion was unused and available.
In addition, at September 30, 2008, we held Canadian third party ABCP
with a face value of Cdn$134 million. When acquired, these investments were
rated R1 (High) by Dominion Bond Rating Service ("DBRS"), which was the
highest credit rating issued for commercial paper. These investments did not
settle at the scheduled maturity during the third quarter of 2007 due to ABCP
market liquidity issues, and as a result we reclassified our ABCP to long-term
investments from cash and cash equivalents. At September 30, 2008, the
carrying value of this investment was Cdn$79 million (December 31, 2007 -
Cdn$121 million), which was based on a valuation technique estimating the fair
value from the perspective of a market participant. Refer to note 9 of our
2007 audited consolidated financial statements for more information regarding
the significant estimates and assumptions incorporated into the valuation of
our ABCP.
During the first nine months of 2008, we recorded a $41 million
impairment charge (Q3 - $24 million; Q1 - $17 million) due to a widening of
the spread between the anticipated return on the restructuring notes (the
"Notes") that are expected to continue performing and current market rates for
instruments of comparable credit quality, term and structure. The widening of
the spread during the first and third quarters of 2008 was primarily due to:
- the anticipated downgrade of the Notes' credit quality by DBRS. The
proposed restructuring plan now anticipates that the Notes will be
rated AA as compared to AAA at December 31, 2007; and
- the widening of market credit spreads as a result of deterioration in
credit markets during the quarter.
Continuing uncertainties regarding the value of the assets that underlie
the ABCP could give rise to a change in the value of our investment in ABCP,
which could impact our earnings. These uncertainties include: (i) the amount
and timing of cash flows associated with the ABCP; (ii) the significant
deterioration of credit markets since September 30, 2008; (iii) the outcome of
the restructuring process; and (iv) the final rating of the Notes that will be
issued by DBRS on closing of the restructuring.
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, 2008 were exercised or
converted:
Class A Subordinate Voting and Class B Shares 112,598,017
Subordinated Debentures(i) 1,096,589
Stock options(ii) 2,934,710
-------------------------------------------------------------------------
116,629,316
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) The above amounts include shares issuable if the holders of the 6.5%
Convertible Subordinated Debentures exercise their conversion option
but exclude Class A Subordinate Voting Shares issuable, only at our
option, to settle interest and principal related to the 6.5%
Convertible Subordinated Debentures on redemption or maturity. The
number of Class A Subordinate Voting Shares issuable at our option
is dependent on the trading price of Class A Subordinate Voting
Shares at the time we elect to settle the 6.5% Convertible
Subordinated Debenture interest and principal with shares.
The above amounts also exclude Class A Subordinate Voting Shares
issuable, only at our option, to settle the 7.08% Subordinated
Debentures on redemption or maturity. The number of shares issuable
is dependent on the trading price of Class A Subordinate Voting
Shares at redemption or maturity of the 7.08% Subordinated
Debentures.
(ii) Options to purchase Class A Subordinate Voting Shares are
exercisable by the holder in accordance with the vesting provisions
and upon payment of the exercise price as may be determined from
time to time pursuant to our stock option plans.
Contractual Obligations and Off-Balance Sheet Financing
There have been no material changes with respect to the contractual
obligations requiring annual payments during the third quarter of 2008 that
are outside the ordinary course of business. Refer to our MD&A included in our
2007 Annual Report.
Long-term receivables in other assets are reflected net of outstanding
borrowings from a customer's finance subsidiary of $17 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, 2008
-------------------------------------------------------------------------
Sales
For the nine months
ended September 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
Vehicle Production Volumes (millions of
units)
North America 9.883 11.444 - 14%
Europe 11.676 12.002 - 3%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 865 $ 844 + 2%
Europe $ 498 $ 421 + 18%
-------------------------------------------------------------------------
Sales
External Production
North America $ 8,545 $ 9,663 - 12%
Europe 5,817 5,055 + 15%
Rest of World 412 287 + 44%
Complete Vehicle Assembly 2,827 3,027 - 7%
Tooling, Engineering and Other 1,267 1,199 + 6%
-------------------------------------------------------------------------
Total Sales $ 18,868 $ 19,231 - 2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
External Production Sales - North America
External production sales in North America decreased 12% or $1.12 billion
to $8.54 billion for the nine months ended September 30, 2008 compared to
$9.66 billion for the nine months ended September 30, 2007. This decrease in
production sales reflects a 14% decrease in North American vehicle production
volumes partially offset by a 2% increase in our North American average dollar
content per vehicle. More importantly, during the first nine months of 2008
our largest customers in North America continued to reduce vehicle production
volumes compared to the first nine months of 2007. While North American
vehicle production volumes declined 14% in the first nine months of 2008
compared to the first nine months of 2007, Chrysler, GM and Ford vehicle
production declined 21%, 20% and 17%, respectively.
Our average dollar content per vehicle grew by 2% or $21 to $865 for the
nine months ended September 30, 2008 compared to $844 for the nine months
ended September 30, 2007. Excluding the effect of foreign exchange our average
dollar content per vehicle decreased primarily as a result of:
- the impact of lower production and/or content on certain programs,
including:
- GM's full-sized pickups and SUVs;
- the Ford F-Series SuperDuty;
- the Ford Explorer and Mercury Mountaineer;
- the Dodge Nitro;
- the Dodge Ram;
- the Chevrolet Trailblazer, GMC Envoy and Buick Rainier;
- the Hummer H3;
- the Ford Expedition and Lincoln Navigator; and
- the Ford Edge and Lincoln MKX;
- programs that ended production during or subsequent to the nine
months ended September 30, 2007, including the Chrysler Pacifica; and
- incremental customer price concessions.
These factors were partially offset by:
- the launch of new programs during or subsequent to the nine months
ended September 30, 2007, including:
- the Dodge Grand Caravan, Chrysler Town & Country and Volkswagen
Routan;
- the Dodge Journey;
- the Ford Flex;
- the Buick Enclave and Chevrolet Traverse;
- the Cadillac CTS;
- the Jeep Liberty;
- the Chevrolet Malibu; and
- the Ford Escape, Mercury Mariner and Mazda Tribute;
- acquisitions completed subsequent to the third quarter of 2007,
including:
- a substantial portion of Plastech's exteriors business; and
- Ogihara; and
- increased production and/or content on certain programs, including
the Chevrolet Cobalt and Pontiac Pursuit.
External Production Sales - Europe
External production sales in Europe increased 15% or $762 million to
$5.8 billion for the nine months ended September 30, 2008 compared to
$5.1 billion for the nine months ended September 30, 2007. This increase in
production sales reflects an 18% increase in our European average dollar
content per vehicle partially offset by a 3% decrease in European vehicle
production volumes.
Our average dollar content per vehicle grew by 18% or $77 to $498 for the
nine months ended September 30, 2008 compared to $421 for the nine months
ended September 30, 2007, primarily as a result of:
- an increase in reported U.S. dollar sales primarily due to the
strengthening of the euro against the U.S. dollar;
- increased production and/or content on certain programs, including:
- the Mercedes-Benz C-Class;
- the Volkswagen Transporter / Multivan;
- the smart fortwo; and
- the Volkswagen Caddy; and
- the launch of new programs during or subsequent to the first nine
months of 2007, including:
- the Volkswagen Tiguan; and
- the MINI Clubman.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the MINI Cooper; and
- the BMW X3;
- programs that ended production during or subsequent to the first nine
months of 2007, including the Chrysler Voyager;
- the sale of certain facilities during or subsequent to the first nine
months of 2007; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in Rest of World increased 44% or $125 million
to $412 million for the nine months ended September 30, 2008 compared to
$287 million for the nine months ended September 30, 2007. The increase in
production sales was primarily as a result of:
- the launch of new programs during or subsequent to the nine months
ended September 30, 2007 in South Africa, China and Korea;
- increased production and/or content on certain programs in China and
Brazil; and
- an increase in reported U.S. dollar sales as a result of the
strengthening of the Chinese Renminbi and Brazilian real, each
against the U.S. dollar.
These factors were partially offset by a decrease in reported U.S. dollar
sales as a result of the weakening of the Korean Won against the U.S. dollar.
Complete Vehicle Assembly Sales
For the nine months
ended September 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales $ 2,827 $ 3,027 - 7%
-------------------------------------------------------------------------
Complete Vehicle Assembly Volumes (Units)
Full-Costed: 83,268 102,215 - 19%
BMW X3, Mercedes-Benz E-Class
and G-Class, and Saab 9(3)
Convertible
Value-Added: 25,235 55,861 - 55%
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep Commander
-------------------------------------------------------------------------
108,503 158,076 - 31%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Complete vehicle assembly sales decreased 7% or $200 million to
$2.8 billion for the nine months ended September 30, 2008 compared to
$3.0 billion for the nine months ended September 30, 2007, while assembly
volumes decreased 31% or 49,573 units. The decrease in complete vehicle
assembly sales is primarily as a result of:
- a decrease in assembly volumes for the BMW X3, Saab 9(3) Convertible,
Chrysler 300, Jeep Commander and Grand Cherokee; and
- the end of production of the Chrysler Voyager at our Graz assembly
facility in the fourth quarter of 2007.
These factors were partially offset by:
- an increase in reported U.S. dollar sales due to the strengthening of
the euro against the U.S. dollar; and
- higher assembly volumes for the Mercedes-Benz G-Class.
Tooling, Engineering and Other
Tooling, engineering and other sales increased 6% or $68 million to
$1.3 billion for the nine months ended September 30, 2008 compared to
$1.2 billion for the nine months ended September 30, 2007.
In the nine months ended September 30, 2008, the major programs for which
we recorded tooling, engineering and other sales were:
- the BMW Z4, X3 and 1-Series;
- the Mazda 6;
- the MINI Cooper, Clubman and Crossman;
- GM's full-size pickups;
- Cadillac BRX and Saab 9-4X;
- Lincoln MKS;
- the Ford F-Series;
- the Mercedes-Benz M-Class;
- the Audi A5; and
- the Ford Freestar.
In the nine months ended September 30, 2007, the major programs for which
we recorded tooling, engineering and other sales were:
- the BMW X3;
- the Dodge Grand Caravan and Chrysler Town & Country;
- GM's full-size pickups;
- the Ford F-Series SuperDuty;
- the Audi A4;
- the Mercedes-Benz C-Class;
- the Mazda 6;
- the Ford Flex; and
- the Ford Taurus and Mercury Sable.
In addition, tooling, engineering and other sales benefited from the
strengthening of the euro and Canadian dollar, each against the U.S. dollar.
EBIT
For the nine months
ended September 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
North America $ (15) $ 573
Europe 316 300
Rest of World 29 12
Corporate and Other 115 23
-------------------------------------------------------------------------
Total EBIT $ 445 $ 908 - 51%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in EBIT for the nine-month periods ended September 30, 2008 and
2007 were the following unusual items, which are discussed previously in the
"Unusual Items" section.
For the nine months
ended September 30,
---------------------
2008 2007
-------------------------------------------------------------------------
North America
Impairment charges $ (263) $ (22)
Restructuring charges (4) (18)
-------------------------------------------------------------------------
(267) (40)
-------------------------------------------------------------------------
Europe
Impairment charges $ (4) $ -
Restructuring charges - (4)
Sale of facilities - (12)
Sale of property - 36
-------------------------------------------------------------------------
(4) 20
-------------------------------------------------------------------------
Corporate and Other
Foreign currency gain 116 7
-------------------------------------------------------------------------
$ (155) $ (13)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America
EBIT in North America decreased $588 million to a loss of $15 million for
the nine months ended September 30, 2008 compared to earnings of $573 million
for the nine months ended September 30, 2007. Excluding the North American
unusual items discussed previously in the "Unusual Items" section, EBIT
decreased $227 million, primarily as a result of:
- lower earnings as a result of a significant decrease in production
volumes, in particular on many high content programs;
- operational inefficiencies and other costs at certain facilities, in
particular at certain powertrain, interior and exterior systems
facilities;
- accelerated amortization of deferred wage buydown assets at a
powertrain systems facility in the United States;
- increased commodity costs;
- increased downsizing costs; and
- incremental customer price concessions.
These factors were partially offset by:
- productivity and efficiency improvements at certain facilities;
- a favourable settlement on research and development incentives;
- incremental margin earned on new programs that launched during or
subsequent to the nine months ended September 30, 2007;
- lower incentive compensation;
- lower affiliation fees paid to corporate;
- incremental margin earned related to the acquisition of Ogihara;
- lower employee profit sharing; and
- the benefit of restructuring activities during or subsequent to the
third quarter of 2007.
Europe
EBIT in Europe increased 5% or $16 million to $316 million for the nine
months ended September 30, 2008 compared to $300 million for the nine months
ended September 30, 2007. Excluding the European unusual items discussed
previously in the "Unusual Items" section, EBIT increased by $40 million,
primarily as a result of:
- operational improvements at certain facilities, in particular at
certain interior systems facilities;
- an increase in reported U.S. dollar EBIT as a result of the
strengthening of the euro against the U.S. dollar;
- incremental margin earned on new programs that launched during or
subsequent to the nine months ended September 30, 2007;
- incremental margin earned on higher volumes for certain production
programs;
- lower employee profit sharing and incentive compensation;
- a favourable revaluation of warranty accruals; and
- the benefit of restructuring activities during or subsequent to the
third quarter of 2007.
These factors were partially offset by:
- lower margins earned as a result of a decrease in vehicle production
volumes for certain programs, including the end of production of the
Chrysler Voyager at our Graz assembly facility in the fourth quarter
of 2007;
- operational inefficiencies and other costs at certain facilities;
- costs incurred in preparation for upcoming launches or for programs
that have not fully ramped up production;
- costs incurred to develop and grow our electronics capabilities; and
- incremental customer price concessions.
Rest of World
EBIT in the Rest of World increased $17 million to $29 million for the
nine months ended September 30, 2008 compared to $12 million for the nine
months ended September 30, 2007. EBIT increased primarily as a result of:
- additional margin earned on the increase in production sales
discussed previously; and
- improved operating efficiencies at certain facilities, primarily in
China.
These factors were partially offset by costs incurred at other new
facilities, primarily in China, as we continue to pursue opportunities in this
growing market and a decrease in equity income earned on our 41% interest in
Shin Young Metal Ind. Co.
Corporate and Other
Corporate and Other EBIT increased $92 million to $115 million for the
nine months ended September 30, 2008 compared to $23 million for the nine
months ended September 30, 2007. Excluding the Corporate and Other unusual
items discussed previously in the "Unusual Items" section, EBIT decreased by
$17 million, primarily as a result of:
- the additional $41 million (2007 - $7 million) write-down of our
investment in ABCP as discussed in the "Cash Resources" section
above;
- a decrease in affiliation fees earned from our divisions; and
- higher charitable donations.
These factors were partially offset by decreased stock compensation and
incentive compensation costs.
SUBSEQUENT EVENTS
-------------------------------------------------------------------------
Subject to approval by the Toronto Stock Exchange ("TSX") and the New
York Stock Exchange ("NYSE"), our Board of Directors yesterday approved the
purchase for cancellation and/or for purposes of our long-term retention
(restricted stock), restricted stock unit and deferred profit sharing
programs, up to 11,000,000 of our Class A Subordinate Voting Shares,
representing approximately 9.9% of our public float of Class A Subordinate
Voting Shares, pursuant to a normal course issuer bid. The normal course
issuer bid is expected to commence on or about November 12, 2008 and will
terminate one year later. All purchases of Class A Subordinate Voting Shares
will be made at the market price at the time of purchase in accordance with
the rules and policies of the TSX and the NYSE, including Rule 10b-18 under
the U.S. Securities Exchange Act of 1934.
COMMITMENTS AND CONTINGENCIES
-------------------------------------------------------------------------
From time to time, we may be contingently liable for litigation and other
claims.
Refer to note 21 of our 2007 audited consolidated financial statements,
which describes these claims. In October 2008, we settled the C-MAC
Invotronics Inc. litigation with no material impact in the quarter.
CONTROLS AND PROCEDURES
-------------------------------------------------------------------------
There have been no changes in our internal controls over financial
reporting that occurred during the nine months ended September 30, 2008 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
-------------------------------------------------------------------------
The previous discussion may contain statements that, to the extent that
they are not recitations of historical fact, constitute "forward-looking
statements" within the meaning of applicable securities legislation.
Forward-looking statements may include financial and other projections, as
well as statements regarding our future plans, objectives or economic
performance, or the assumptions underlying any of the foregoing. We use words
such as "may", "would", "could", "will", "likely", "expect", "anticipate",
"believe", "intend", "plan", "forecast", "project", "estimate" and similar
expressions to identify forward-looking statements. Any such forward-looking
statements are based on assumptions and analyses made by us in light of our
experience and our perception of historical trends, current conditions and
expected future developments, as well as other factors we believe are
appropriate in the circumstances. However, whether actual results and
developments will conform with our expectations and predictions is subject to
a number of risks, assumptions and uncertainties. These risks, assumptions and
uncertainties include, without limitation, the impact of: shifting OEM market
shares; declining production volumes and changes in consumer demand for
vehicles; a reduction in the production volumes of certain vehicles, such as
certain light trucks; the termination or non-renewal by our customers of any
material contracts; our ability to offset increases in the cost of
commodities, such as steel and resins, as well as energy prices; fluctuations
in relative currency values; our ability to offset price concessions demanded
by our customers; our dependence on outsourcing by our customers; our ability
to compete with suppliers with operations in low cost countries; changes in
our mix of earnings between jurisdictions with lower tax rates and those with
higher tax rates, as well as our ability to fully benefit tax losses; other
potential tax exposures; the financial distress of some of our suppliers and
customers; the inability of our customers to meet their financial obligations
to us; our ability to fully recover pre-production expenses; warranty and
recall costs; product liability claims in excess of our insurance coverage;
expenses related to the restructuring and rationalization of some of our
operations; impairment charges; our ability to successfully identify, complete
and integrate acquisitions; risks associated with program launches; legal
claims against us; risks of conducting business in foreign countries including
Russia; the risk that the growth prospects expected to be realized in Russia
and other markets may not be fully realized, may take longer to realize than
expected or may not be realized at all; work stoppages and labour relations
disputes; changes in laws and governmental regulations; costs associated with
compliance with environmental laws and regulations; potential conflicts of
interest involving our indirect controlling shareholder, the Stronach Trust;
and other factors set out in our Annual Information Form filed with securities
commissions in Canada and our annual report on Form 40-F filed with the United
States Securities and Exchange Commission, and subsequent filings. In
evaluating forward-looking statements, readers should specifically consider
the various factors which could cause actual events or results to differ
materially from those indicated by such forward-looking statements. Unless
otherwise required by applicable securities laws, we do not intend, nor do we
undertake any obligation, to update or revise any forward-looking statements
to reflect subsequent information, events, results or circumstances or
otherwise.
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(U.S. dollars in millions, except per share figures)
Three months ended Nine months ended
September 30, September 30,
--------------------- --------------------
Note 2008 2007 2008 2007
-------------------------------------------------------------------------
Sales $ 5,533 $ 6,077 $ 18,868 $ 19,231
-------------------------------------------------------------------------
Cost of goods sold 4,933 5,279 16,535 16,618
Depreciation and
amortization 217 220 664 633
Selling, general and
administrative 9, 12 253 330 976 1,058
Interest income, net (14) (19) (48) (41)
Equity income (2) - (19) (8)
Impairment charges 2 258 - 267 22
-------------------------------------------------------------------------
Income (loss) from
operations before
income taxes (112) 267 493 949
Income taxes 8 103 112 274 314
-------------------------------------------------------------------------
Net (loss) income (215) 155 219 635
Other comprehensive
(loss) income: 12
Net realized and
unrealized (losses)
gains on translation
of net investment in
foreign operations (354) 308 (294) 609
Repurchase of shares 10 - (156) (32) (156)
Net unrealized losses
on cash flow hedges (12) (6) (6) (6)
Reclassifications of
net (gains) losses
on cash flow hedges
to net (loss) income (1) (1) (3) 3
-------------------------------------------------------------------------
Comprehensive (loss) income $ (582) $ 300 $ (116) $ 1,085
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per
Class A Subordinate
Voting or Class B Share:
Basic $ (1.93) $ 1.40 $ 1.94 $ 5.80
Diluted $ (1.93) $ 1.38 $ 1.92 $ 5.69
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash dividends paid per
Class A Subordinate
Voting or Class B Share $ 0.36 $ 0.36 $ 1.08 $ 0.79
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A
Subordinate Voting and
Class B Shares
outstanding during the
period (in millions):
Basic 111.6 110.5 113.2 109.5
Diluted 111.6 113.1 114.4 112.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
(U.S. dollars in millions)
Three months ended Nine months ended
September 30, September 30,
--------------------- --------------------
Note 2008 2007 2008 2007
-------------------------------------------------------------------------
Retained earnings,
beginning of period $ 3,780 $ 4,206 $ 3,526 $ 3,773
Net (loss) income (215) 155 219 635
Dividends on Class A
Subordinate Voting
and Class B Shares (40) (42) (122) (89)
Repurchase of Class A
Subordinate Voting
Shares 10 - (655) (98) (655)
Repurchase of Class B
Shares 10 - (24) - (24)
-------------------------------------------------------------------------
Retained earnings,
end of period $ 3,525 $ 3,640 $ 3,525 $ 3,640
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided from
(used for):
OPERATING ACTIVITIES
Net (loss) income $ (215) $ 155 $ 219 $ 635
Items not involving
current cash flows 490 185 991 623
-------------------------------------------------------------------------
275 340 1,210 1,258
Changes in non cash
operating assets
and liabilities (25) (123) (532) (494)
-------------------------------------------------------------------------
250 217 678 764
-------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Fixed asset additions (150) (174) (465) (436)
Purchase of subsidiaries 4 (4) - (109) (46)
Increase in investments
and other assets 5 (82) (145) (196) (175)
Proceeds from disposition 31 76 56 103
-------------------------------------------------------------------------
(205) (243) (714) (554)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayments of debt (35) (53) (100) (68)
Issues of debt - 3 2 34
Issues of Class A
Subordinate Voting Shares - 1,537 - 1,560
Repurchase of Class A
Subordinate Voting
Shares 10 - (1,091) (247) (1,091)
Repurchase of Class B
Shares - (24) - (24)
Dividends (40) (42) (121) (89)
-------------------------------------------------------------------------
(75) 330 (466) 322
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash and
cash equivalents (93) 115 (55) 235
-------------------------------------------------------------------------
Net (decrease) increase
in cash and cash
equivalents during
the period (123) 419 (557) 767
Cash and cash equivalents,
beginning of period 2,520 2,233 2,954 1,885
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 2,397 $ 2,652 $ 2,397 $ 2,652
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars in millions)
September 30, December 31,
Note 2008 2007
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 2,397 $ 2,954
Accounts receivable 4,018 3,981
Inventories 1,831 1,681
Prepaid expenses and other 151 154
-------------------------------------------------------------------------
8,397 8,770
-------------------------------------------------------------------------
Investments 3 229 280
Fixed assets, net 2 3,845 4,307
Goodwill 4 1,228 1,237
Future tax assets 8 158 280
Other assets 5 597 469
-------------------------------------------------------------------------
$ 14,454 $ 15,343
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness $ 73 $ 89
Accounts payable 3,544 3,492
Accrued salaries and wages 577 544
Other accrued liabilities 6 861 911
Income taxes payable 33 248
Long term debt due within one year 442 374
-------------------------------------------------------------------------
5,530 5,658
-------------------------------------------------------------------------
Deferred revenue 40 60
Long term debt 170 337
Other long term liabilities 380 394
Future tax liabilities 138 252
-------------------------------------------------------------------------
6,258 6,701
-------------------------------------------------------------------------
Shareholders' equity
Capital stock 10
Class A Subordinate Voting Shares
(issued: 111,871,188;
December 31, 2007 - 115,344,184) 3,597 3,708
Class B Shares
(convertible into Class A
Subordinate Voting Shares)
(issued: 726,829) - -
Contributed surplus 11 59 58
Retained earnings 3,525 3,526
Accumulated other comprehensive income 12 1,015 1,350
-------------------------------------------------------------------------
8,196 8,642
-------------------------------------------------------------------------
$ 14,454 $ 15,343
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars and all tabular amounts in millions unless
otherwise noted)
-------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Magna
International Inc. and its subsidiaries (collectively "Magna" or the
"Company") have been prepared in United States dollars following
Canadian generally accepted accounting principles ("GAAP") with
respect to the preparation of interim financial information.
Accordingly, they do not include all the information and footnotes as
required in the preparation of annual financial statements and should
be read in conjunction with the December 31, 2007 audited
consolidated financial statements and notes included in the Company's
2007 Annual Report. These interim consolidated financial statements
have been prepared using the same accounting policies as the
December 31, 2007 annual consolidated financial statements, except
the company prospectively adopted the new Canadian Institute of
Chartered Accountants Handbook Section 3031, "Inventories", with no
restatement of prior periods. The adoption of these recommendations
had no material impact on the interim consolidated financial
statements.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring adjustments, necessary to present fairly the
financial position at September 30, 2008 and the results of
operations and cash flows for the three-month and nine-month periods
ended September 30, 2008 and 2007.
2. RESTRUCTURING AND IMPAIRMENT CHARGES
During the first nine months of 2008 and 2007, the Company recorded
impairment charges as follows:
2008 2007
---------------------- ----------------------
Operating Net Operating Net
Income Income Income Income
---------------------------------------------------------------------
Third Quarter
North America $ 258 $ 223 $ - $ -
---------------------------------------------------------------------
Second Quarter
North America 5 3 22 14
Europe 4 4 - -
---------------------------------------------------------------------
Total second quarter
impairment charges 9 7 22 14
---------------------------------------------------------------------
Total year to date
impairment charges $ 267 $ 230 $ 22 $ 14
---------------------------------------------------------------------
---------------------------------------------------------------------
(a) For the nine months ended September 30, 2008
Historically, the Company completed its annual goodwill and long-
lived impairment analyses in the fourth quarter of each year.
However, as a result of the significant and accelerated declines
in vehicle production volumes primarily in North America, the
Company reviewed goodwill and long-lived assets for impairment
during the third quarter of 2008. The decline in North American
vehicle production volumes is due to a drop in consumer demand
for automobiles primarily as a result of:
- high oil prices;
- falling equity and home values;
- the global credit crisis including reduced consumer credit
availability;
- higher unemployment;
- negative economic trends:
- falling consumer confidence; and
- related factors.
When the carrying value of the asset exceeds the estimated
undiscounted cash flows from the use of the asset, then an
impairment loss is recognized to write the asset down to fair
value. The fair value of long-lived assets is generally
determined using estimated discounted future cash flows.
As a result, during the third quarter of 2008 the Company
recorded long-lived asset impairment charges of $258 million,
related primarily to Magna's powertrain, and interior and
exterior systems operations in the United States and Canada. At
the Company's powertrain operations, particularly a facility in
Syracuse, New York, asset impairment charges of $186 million
($166 million after tax) were recorded primarily as a result of
the following factors:
- a dramatic market shift away from truck programs, in
particular, four wheel drive pick-ups and SUVs;
- excess die-casting, machining and assembly capacity; and
- historical losses that are projected to continue throughout
the Company's business planning period.
At the Company's interior and exteriors systems operations, asset
impairment charges of $65 million ($52 million after tax) were
recorded primarily as a result of the following factors:
- significantly lower volumes on certain pick-up and SUV
programs;
- the loss of certain replacement business;
- capacity utilization that is not sufficient to support the
current overhead structure; and
- historical losses that are projected to continue throughout
the Company's business planning period.
During the second quarter of 2008, the Company recorded a
$5 million asset impairment related to specific assets at a
seating systems facility that supplied complete seats to
Chrysler's minivan facility in St. Louis. In Europe, the Company
recorded a $4 million asset impairment relating to specific
assets at an interior systems facility that was disposed of
during the third quarter of 2008.
In addition to the impairment charges recorded above, during the
third quarter of 2008 the Company incurred restructuring and
rationalization costs of $4 million related to the closure of the
seating facility in St. Louis.
(b) For the nine months ended September 30, 2007
During the second quarter of 2007, the Company recorded an asset
impairment of $22 million ($14 million after tax) related to
specific assets at a powertrain facility in Syracuse, New York.
During the third quarter of 2007, the Company incurred
restructuring and rationalization charges of $8 million related
to three facilities in North America, and during the second
quarter of 2007, incurred charges of $10 million related to two
facilities in North America and $4 million related to one
facility in Europe
3. INVESTMENTS
At September 30, 2008, the Company held Canadian third party asset-
backed commercial paper ("ABCP") with a face value of
Cdn$134 million. When acquired, these investments were rated R1
(High) by Dominion Bond Rating Service ("DBRS"), which was the
highest credit rating issued for commercial paper. These investments
did not settle at the scheduled maturity during the third quarter of
2007 due to ABCP market liquidity issues, and as a result the Company
reclassified its ABCP to long-term investments from cash and cash
equivalents. At September 30, 2008, the carrying value of this
investment was Cdn$79 million (December 31, 2007 - Cdn$121 million),
which was based on a valuation technique estimating the fair value
from the perspective of a market participant. Refer to note 9 of the
Company's 2007 audited consolidated financial statements for more
information regarding the significant estimates and assumptions
incorporated into the valuation of our ABCP.
During the first nine months of 2008, the Company recorded a
$41 million impairment charge (Q3 - $24 million; Q1 - $17 million)
due to a widening of the spread between the anticipated return on the
restructuring notes (the "Notes") that are expected to continue
performing and current market rates for instruments of comparable
credit quality, term and structure. The widening of the spread during
2008 was primarily due to:
- the anticipated downgrade of the Notes' credit quality by DBRS.
The proposed restructuring plan now anticipates that the Notes
will be rated AA as compared to AAA at December 31, 2007; and
- the widening of market credit spreads as a result of deterioration
in credit markets during the first nine months of 2008.
Continuing uncertainties regarding the value of the assets which
underlie the ABCP could give rise to a change in the value of the
Company's investment in ABCP, which could impact earnings. These
uncertainties include: (i) the amount and timing of cash flows
associated with the ABCP; (ii) the significant deterioration of
credit markets since September 30, 2008; (iii) the outcome of the
restructuring process; and (iv) the final rating of the Notes that
will be issued by DBRS on closing of the restructuring.
4. ACQUISITIONS
On May 30, 2008, Magna acquired a facility from Ogihara America
Corporation. The facility in Birmingham, Alabama manufactures major
exterior and structural welded assemblies for sales to various
customers, including Mercedes-Benz.
On June 16, 2008, Magna was the successful bidder to acquire a
substantial portion of the exteriors business and related assets from
Plastech Engineered Product Inc., in a Chapter 11 sale out of
bankruptcy. The acquired business supplies parts to various
customers, including Chrysler, Ford and General Motors in the United
States and Canada.
The total consideration for these and other small acquisitions was
$112 million, consisting of $109 million paid in cash and $3 million
of assumed debt. The excess purchase price over the book value of
assets acquired and liabilities assumed was $25 million.
The purchase price allocations for these acquisitions are preliminary
and adjustments to the allocations may occur as a result of obtaining
more information regarding asset valuations. On a preliminary basis,
an allocation of the excess purchase price over the book value of
assets acquired and liabilities assumed has been made to fixed
assets, goodwill, and intangible assets.
5. OTHER ASSETS
Other assets consist of:
2008 2007
---------------------------------------------------------------------
Long-term receivables (a) $ 77 $ 128
Preproduction costs related to
long-term supply agreements with
contractual guarantee for reimbursement 148 94
Patents and licences, net 58 67
Employee wage buydown, net 73 -
Other, net 241 180
---------------------------------------------------------------------
$ 597 $ 469
---------------------------------------------------------------------
---------------------------------------------------------------------
(a) Long-term receivables are reflected net of outstanding borrowings
from a customer's finance subsidiary of $17 million (2007 -
$37 million) since the Company has a legal right of set-off of
its long-term receivable against such borrowings and intends to
settle the related amounts simultaneously.
6. WARRANTY
The following is a continuity of the Company's warranty accruals:
2008 2007
---------------------------------------------------------------------
Balance, beginning of period $ 103 $ 94
Expense, net 10 3
Settlements (11) (6)
Acquisition - 1
Foreign exchange and other 3 1
---------------------------------------------------------------------
Balance, March 31, 105 93
Expense (income), net (17) 8
Settlements 4 (7)
Foreign exchange and other 1 9
---------------------------------------------------------------------
Balance, June 30, 93 103
Income, net (1) (6)
Settlements (5) (5)
Foreign exchange and other (6) 6
---------------------------------------------------------------------
Balance, September 30, $ 81 $ 110
---------------------------------------------------------------------
---------------------------------------------------------------------
7. EMPLOYEE FUTURE BENEFIT PLANS
The Company recorded employee future benefit expenses as follows:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Defined benefit pension
plans and other $ 2 $ 4 $ 9 $ 15
Termination and long
service arrangements 3 6 19 16
Retirement medical
benefits plan 4 3 11 9
-------------------------------------------------------------------------
$ 9 $ 13 $ 39 $ 40
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. INCOME TAXES
During the third quarter of 2008, the Company recorded a $123 million
charge to establish valuation allowances against all future tax
assets in the United States.
Accounting standards require that the Company assess whether
valuation allowances should be established against future income tax
assets based on the consideration of all available evidence using a
"more likely than not" standard. The factors used to assess the
likelihood of realization are past history of earnings, forecast of
future taxable income and available tax planning strategies that
could be implemented to realize the future tax assets. The valuation
allowances were required in the United States based on:
- historical consolidated losses at the Company's U.S. operations
that are expected to continue in the near-term;
- the accelerated deterioration of near-term automotive market
conditions in the United States; and
- significant and inherent uncertainty as to the timing of when
we would be able to generate the necessary level of earnings to
recover these future tax assets.
9. STOCK BASED COMPENSATION
(a) Incentive Stock Option Plan
The following is a continuity schedule of options outstanding
(number of options in the table below are expressed in whole
numbers):
2008 2007
------------------------------ ------------------------------
Options outstanding Options outstanding
------------------- -------------------
Number of Number of
Exercise options Exercise options
Number of price exercis- Number of price exercis-
options (i) able options (i) able
-------------------------------------------------------------------------
Beginning
of period 2,942,203 82.66 2,912,877 4,087,249 77.45 3,811,336
Granted 5,000 74.50 - - - -
Exercised (1,230) 55.00 (1,230) (74,082) 63.21 (74,082)
Cancelled (10,000) 97.47 (10,000) (7,306) 73.64 (4,400)
Vested - - 10,326 - - 55,443
-------------------------------------------------------------------------
March 31 2,935,973 82.61 2,911,973 4,005,861 77.72 3,788,297
Granted - - - 40,000 88.87 -
Exercised (383) 55.00 (383) (590,008) 64.08 (590,008)
Cancelled - - - (366,686) 69.78 (361,641)
Vested - - 1,000 - - 29,000
-------------------------------------------------------------------------
June 30 2,935,590 82.62 2,912,590 3,089,167 81.41 2,865,648
Granted - - - 15,000 95.96 -
Exercised - - - (157,844) 59.99 (157,844)
Vested - - 3,000 - - 3,880
Cancelled (880) 71.71 (880) (880) 71.71 -
-------------------------------------------------------------------------
September
30 2,934,710 82.62 2,914,710 2,945,443 82.64 2,711,684
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) The exercise price noted above represents the weighted
average exercise price in Canadian dollars.
The weighted average assumptions used in measuring the fair value
of stock options granted or modified and the compensation expense
recorded in selling, general and administrative expenses are as
follows:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Risk free interest rate - 4.25% 3.56% 4.33%
Expected dividend yield - 1.51% 2.02% 1.14%
Expected volatility - 22% 22% 22%
Expected time until exercise - 4 years 4 years 4 years
-------------------------------------------------------------------------
Weighted average fair value
of options granted or
modified in period (Cdn$) $ - $ 19.89 $ 13.65 $ 19.50
-------------------------------------------------------------------------
Compensation expense recorded
in selling, general and
administrative expenses $ - $ - $ - $ 2
-------------------------------------------------------------------------
(b) Long-term retention program
Information about the Company's long-term retention program is as
follows:
September December
30, 2008 31, 2007
-----------------------------------------------------------------
Class A Subordinate Voting Shares awarded
and not released 823,477 893,541
-----------------------------------------------------------------
Reduction in stated value of Class A
Subordinate Voting Shares $ 51 $ 55
-----------------------------------------------------------------
Unamortized compensation expense
recorded as a reduction of
shareholder's equity $ 31 $ 36
-----------------------------------------------------------------
Compensation expense recorded in selling, general and
administrative expenses during the three and nine month periods
ended September 30, 2008 was $2 million (2007 - $3 million),
and $6 million (2007 - $17 million), respectively.
10. CAPITAL STOCK
(a) Changes in the Class A Subordinate Voting Shares for the
three-month and nine-month periods ended September 30, 2008
consist of the following (numbers of shares in the following
table are expressed in whole numbers):
Subordinate Voting
------------------------
Number of Stated
shares value
-----------------------------------------------------------------
Issued and outstanding at
December 31, 2007 115,344,184 $ 3,708
Repurchase and cancellation(b) (1,555,900) (51)
Issued under the Incentive
Stock Option Plan 1,230 -
Issued under the Dividend
Reinvestment Plan 2,477 -
Release of restricted stock - 4
Repurchase(b) - (2)
-----------------------------------------------------------------
Issued and outstanding at
March 31, 2008 113,791,991 3,659
Repurchase and cancellation(b) (1,938,830) (63)
Issued under the Incentive
Stock Option Plan 383 -
Issued under the Dividend
Reinvestment Plan 6,689 1
-----------------------------------------------------------------
Issued and outstanding at
June 30, 2008 111,860,233 3,597
Issued under the Dividend
Reinvestment Plan 10,955 -
-----------------------------------------------------------------
Issued and outstanding at
September 30, 2008 111,871,188 $ 3,597
-----------------------------------------------------------------
-----------------------------------------------------------------
(b) On November 8, 2007, the Toronto Stock Exchange ("TSX")
accepted the Company's Notice of Intention to Make a Normal
Course Issuer Bid (the "Notice") relating to the purchase for
cancellation and/or for purposes of the Company's long-term
retention (restricted stock), restricted stock unit ("RSU") and
similar programs, of up to 9.0 million Class A Subordinate
Voting Shares of the Company (the "Bid"), representing
approximately 9.9% of the public float of such shares. The Bid
commenced on November 12, 2007 and will terminate no later than
November 11, 2008. All purchases of Class A Subordinate Voting
Shares are made at the market price at the time of purchase in
accordance with the rules and policies of the TSX and
Rule 10b-18 under the U.S. Securities Exchange Act of 1934.
Subject to certain exceptions for block purchases, the maximum
number of shares which can be purchased per day during the Bid
is 91,737 for purchases on the TSX, and 25% of the average
daily trading volume for the four calendar weeks preceding the
date of purchase for purchases on the New York Stock Exchange.
No shares were repurchased during the third quarter of 2008.
During the three months ended June 30, 2008 and March 31, 2008,
the Company purchased for cancellation 1.9 million and
1.6 million Class A Subordinate Voting Shares, respectively,
for aggregate cash consideration of $134 million and
$111 million, respectively. The excess of the cash paid over
the book value of the Class A Subordinate Voting Shares
repurchased of $53 million and $45 million, respectively, was
charged to retained earnings.
During the three months ended March 31, 2008, the Company also
purchased 30,188 Magna Class A Subordinate Voting Shares for
aggregate cash consideration of $2 million. These shares are
being held in trust for purposes of the Company's restricted
stock unit program and are reflected as a reduction in the
stated value of the Company's Class A Subordinate Voting
Shares.
(c) The following table presents the maximum number of shares that
would be outstanding if all the dilutive instruments
outstanding at November 3, 2008 were exercised or converted:
Class A Subordinate Voting and Class B Shares 112,598,017
Subordinated Debentures(i) 1,096,589
Stock options(ii) 2,934,710
-----------------------------------------------------------------
116,629,316
-----------------------------------------------------------------
-----------------------------------------------------------------
(i) The above amounts include shares issuable if the holders
of the 6.5% Convertible Subordinated Debentures exercise
their conversion option but exclude Class A Subordinate
Voting Shares issuable, only at the Company's option, to
settle interest and principal related to the 6.5%
Convertible Subordinated Debentures on redemption or
maturity. The number of Class A Subordinate Voting Shares
issuable at the Company's option is dependent on the trading
price of Class A Subordinate Voting Shares at the time the
Company elects to settle the 6.5% Convertible Subordinated
Debenture interest and principal with shares. All or part of
the 6.5% Convertible Subordinate Debentures are currently
redeemable at the Company's option.
The above amounts also exclude Class A Subordinate Voting
Shares issuable, only at the Company's option, to settle the
7.08% Subordinated Debentures on redemption or maturity. The
number of shares issuable is dependent on the trading price
of Class A Subordinate Voting Shares at redemption or
maturity of the 7.08% Subordinated Debentures.
(ii) Options to purchase Class A Subordinate Voting Shares are
exercisable by the holder in accordance with the vesting
provisions and upon payment of the exercise price as may be
determined from time to time pursuant to the Company's
stock option plans.
11. CONTRIBUTED SURPLUS
Contributed surplus consists of accumulated stock option compensation
expense less the fair value of options at the grant date that have
been exercised and credited to Class A Subordinate Voting Shares, the
accumulated restricted stock compensation expense and the value of
the holders' conversion option on the 6.5% Convertible Subordinated
Debentures. The following is a continuity schedule of contributed
surplus:
2008 2007
---------------------------------------------------------------------
Stock-based compensation
Balance, beginning of period $ 55 $ 62
Stock-based compensation expense 2 2
Exercise of options - (1)
Release of restricted stock (4) (3)
---------------------------------------------------------------------
Balance, March 31, 53 60
Stock-based compensation expense 2 14
Exercise of options - (3)
Exercise of stock appreciation rights - (11)
Release of restricted stock - (6)
---------------------------------------------------------------------
Balance, June 30, 55 54
Stock-based compensation expense 1 2
Release of restricted stock - (1)
---------------------------------------------------------------------
Balance, September 30, 56 55
Holders' conversion option 3 3
---------------------------------------------------------------------
$ 59 $ 58
---------------------------------------------------------------------
---------------------------------------------------------------------
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following is a continuity schedule of accumulated other
comprehensive income:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Accumulated net unrealized
gains on translation of
net investment in foreign
operations
Balance, beginning
of period $ 1,388 $ 1,115 $ 1,360 $ 814
Repurchase of shares
(note 9) - (156) (32) (156)
Reclassification of gain
on translation of net
investment in foreign
operations to net income
(loss)(i) (116) (7) (116) (7)
Net unrealized gains
(losses) on translation
of net investment in
foreign operations (238) 315 (178) 616
-------------------------------------------------------------------------
Balance, end of period 1,034 1,267 1,034 1,267
-------------------------------------------------------------------------
Accumulated net unrealized
gain on cash flow hedges
Balance, beginning of
period(ii) (6) 1 (10) -
Net unrealized losses on
cash flow hedges(ii) (12) (6) (6) (6)
Reclassifications of net
losses (gains) on cash
flow hedges to net
income (loss)(ii) (1) (1) (3) 3
Adjustment for change in
accounting policy(iv) - - - (3)
-------------------------------------------------------------------------
Balance, end of period (19) (6) (19) (6)
-------------------------------------------------------------------------
Total accumulated other
comprehensive income $ 1,015 $ 1,261 $ 1,015 $ 1,261
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) In the normal course of business, the Company reviews its cash
investment strategies, including where such funds are invested.
As a result of these reviews, during the third quarters of 2008
and 2007 the Company repatriated funds from Europe and as a
result recorded foreign currency gains in selling, general and
administrative expenses of $116 million and $7 million,
respectively.
(ii) The amount of income tax benefit (expense) that has been netted
in the amounts above is as follows:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2008 2007 2008 2007
---------------------------------------------------------------
Balance,
beginning
of period $ 3 $ (1) $ 4 $ -
Net unrealized
losses on cash
flow hedges 4 2 2 2
Reclassifications
of net losses
(gains) on cash
flow hedges to
net income (loss) 1 1 2 (1)
Adjustment for
change in
accounting policy - - - 1
---------------------------------------------------------------
Balance, end of
Period $ 8 $ 2 $ 8 $ 2
---------------------------------------------------------------
The amount of other comprehensive loss that is expected to be
reclassified to net income over the next 12 months is $8 million (net
of income tax benefit of $3 million).
13. CAPITAL DISCLOSURES
The Company manages capital in order to ensure the Company has
adequate borrowing capacity and financial structure to allow
financial flexibility and to provide an adequate return to
shareholders. In order to maintain or adjust the capital structure,
the Company may adjust the amount of dividends paid to shareholders,
issue new shares, purchase shares for cancellation or increase or
decrease the amount of debt outstanding.
The Company monitors capital using the ratio of debt to total
capitalization. Debt includes bank indebtedness and long term debt as
shown in the balance sheet. Total capitalization includes debt and
all components of shareholders' equity.
The Company's capitalization and debt to total capitalization is as
follows:
September 30, December 31,
2008 2007
---------------------------------------------------------------------
Liabilities
Bank indebtedness $ 73 $ 89
Long term debt due within one year 442 374
Long term debt 170 337
---------------------------------------------------------------------
685 800
Shareholders' equity 8,196 8,642
---------------------------------------------------------------------
Total capitalization $ 8,881 $ 9,442
---------------------------------------------------------------------
---------------------------------------------------------------------
Debt to total capitalization 7.7% 8.5%
---------------------------------------------------------------------
---------------------------------------------------------------------
14. FINANCIAL INSTRUMENTS
(a) The Company's financial assets and financial liabilities consist
of the following:
September 30, December 31,
2008 2007
---------------------------------------------------------------------
Held for trading
Cash and cash equivalents $ 2,397 $ 2,954
---------------------------------------------------------------------
---------------------------------------------------------------------
Held to maturity investments
Investment in ABCP $ 76 $ 121
Severance investments 10 10
---------------------------------------------------------------------
$ 86 $ 131
---------------------------------------------------------------------
---------------------------------------------------------------------
Loans and Receivables
Accounts receivable $ 4,018 $ 3,981
Long-term receivables included in other
assets 77 128
---------------------------------------------------------------------
$ 4,095 $ 4,109
---------------------------------------------------------------------
---------------------------------------------------------------------
Other financial liabilities
Bank indebtedness $ 73 $ 89
Long-term debt (including portion due
within one year) 612 711
Accounts payable 3,544 3,492
Accrued salaries and wages 577 544
Other accrued liabilities 861 911
Income taxes payable 33 248
---------------------------------------------------------------------
$ 5,700 $ 5,995
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) Fair value
The Company has determined the estimated fair values of its
financial instruments based on appropriate valuation
methodologies; however, considerable judgment is required to
develop these estimates. Accordingly, these estimated fair values
are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The estimated fair value
amounts can be materially affected by the use of different
assumptions or methodologies. The methods and assumptions used to
estimate the fair value of financial instruments are described
below:
Cash and cash equivalents, bank indebtedness, accounts payable,
accrued salaries and wages, other accrued liabilities and income
taxes payable
Due to the short period to maturity of the instruments, the
carrying values as presented in the consolidated balance sheets
are reasonable estimates of fair values.
Investments
Fair value information is not readily determinable for the
Company's investment in ABCP. At September 30, 2008, the Company
recorded its investment in ABCP at its estimated fair value
(note 3).
Long-term debt
The Company's term debt includes $442 million due within one
year. Due to the short period to maturity of this debt, the
carrying value as presented in the consolidated balance sheet is
a reasonable estimate of its fair value. The fair value of the
Company's long-term debt, based on current rates for debt with
similar terms and maturities, is not materially different from
its carrying value.
(c) Credit risk
The Company's financial assets that are exposed to credit risk
consist primarily of cash and cash equivalents, accounts
receivable, held to maturity investments, and foreign exchange
forward contracts with positive fair values.
The Company's held to maturity investments includes an investment
in ABCP (note 3). Given the continuing uncertainties regarding:
(i) the value of the underlying assets; (ii) the amount and
timing of cash flows; (iii) the significant deterioration in
credit markets since September 30, 2008; (iv) the successful
restructuring of the ABCP; and (v) the final rating of the Notes
that will be issued by DBRS on closing of the restructuring, the
Company could be exposed to further losses on its investment.
Cash and cash equivalents, which consists of short-term
investments, are invested in governments, bank term deposits and
bank commercial paper with an investment grade credit rating.
Credit risk is further reduced by providing limits for certain
government issued paper and all bank issued commercial paper and
term deposits.
The Company is also exposed to credit risk from the potential
default by any of its counterparties on its foreign exchange
forward contracts. The Company mitigates this credit risk by
dealing with counterparties who are major financial institutions
that the Company anticipates will satisfy their obligations under
the contracts.
In the normal course of business, the Company is exposed to
credit risk from its customers, substantially all of which are in
the automotive industry. These accounts receivable are subject to
normal industry credit risks. However, in North America, sales to
the Company's three largest customers (the "Detroit 3")
represented 47% of the Company's total sales. The Detroit 3 are
rated as below investment grade by credit rating agencies and
experienced a credit rating downgrade in the third quarter. The
inability of these customers to satisfy their financial
obligations to the Company and the potential for these customers
to seek protection from their creditors represent material credit
risks to the Company.
For the three months ended September 30, 2008, sales to the
Company's five largest customers (including the Detroit 3)
represented 76% of our total sales, and substantially all of our
sales are to customers in which the Company has ongoing
contractual relationships. Due to the nature of these business
relationships and the level of integration the Company has with
its customers, the Company's exposure to overdue accounts
receivable does not represent a material credit risk to the
Company.
(d) Currency risk
The Company is exposed to fluctuations in foreign exchange rates
when manufacturing facilities have committed to the delivery of
products for which the selling price has been quoted in
currencies other than the facilities' functional currency, or
when materials and equipment are purchased in currencies other
than the facilities' functional currency. In an effort to manage
this net foreign exchange exposure, the Company employs hedging
programs, primarily through the use of foreign exchange forward
contracts.
As at September 30, 2008, the net foreign exchange exposure was
not material.
(e) Interest rate risk
The Company is not exposed to significant interest rate risk due
to the short-term maturity of its monetary current assets and
current liabilities. In particular, the amount of interest income
earned on our cash and cash equivalents is impacted more by the
investment decisions made and the demands to have available cash
on hand, than by movements in the interest rates over a given
period.
In addition, the Company is not exposed to interest rate risk on
its long-term debt instruments as the interest rates on these
instruments are fixed.
15. SEGMENTED INFORMATION
Three months ended
September 30, 2008
----------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 1,239 $ 1,159 $ 824
United States 1,227 1,174 842
Mexico 473 428 365
Eliminations (154) - -
---------------------------------------------------------------------
2,785 2,761 $ (303) 2,031
Europe
Euroland 2,222 2,177 1,081
Great Britain 248 248 85
Other European
countries 222 188 155
Eliminations (56) - -
---------------------------------------------------------------------
2,636 2,613 52 1,321
Rest of World 168 155 9 172
Corporate and Other (56) 4 116 321
---------------------------------------------------------------------
Total reportable
segments $ 5,533 $ 5,533 $ (126) 3,845
Current assets 8,397
Investments, goodwill and
other assets 2,212
---------------------------------------------------------------------
Consolidated total assets $ 14,454
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended
September 30, 2007
----------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 1,639 $ 1,570 $ 1,141
United States 1,368 1,324 1,010
Mexico 409 368 371
Eliminations (143) - -
---------------------------------------------------------------------
3,273 3,262 $ 165 2,522
Europe
Euroland 2,321 2,282 1,068
Great Britain 292 292 88
Other European
countries 161 131 129
Eliminations (50) - -
---------------------------------------------------------------------
2,724 2,705 84 1,285
Rest of World 123 107 2 142
Corporate and Other (43) 3 (3) 254
---------------------------------------------------------------------
Total reportable
segments $ 6,077 $ 6,077 $ 248 4,203
Current assets 9,024
Investments, goodwill and
other assets 2,286
---------------------------------------------------------------------
Consolidated total assets $ 15,513
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine months ended
September 30, 2008
----------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 4,359 $ 4,098 $ 824
United States 3,987 3,827 842
Mexico 1,387 1,234 365
Eliminations (503) - -
---------------------------------------------------------------------
9,230 9,159 $ (15) 2,031
Europe
Euroland 7,906 7,746 1,081
Great Britain 890 887 85
Other European
countries 735 624 155
Eliminations (195) - -
---------------------------------------------------------------------
9,336 9,257 316 1,321
Rest of World 481 439 29 172
Corporate and Other (179) 13 115 321
---------------------------------------------------------------------
Total reportable
segments $ 18,868 $ 18,868 $ 445 3,845
Current assets 8,397
Investments, goodwill
and other assets 2,212
---------------------------------------------------------------------
Consolidated total assets $ 14,454
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine months ended
September 30, 2007
----------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 5,150 $ 4,947 $ 1,141
United States 4,432 4,309 1,010
Mexico 1,138 1,006 371
Eliminations (417) - -
---------------------------------------------------------------------
10,303 10,262 $ 573 2,522
Europe
Euroland 7,399 7,275 1,068
Great Britain 882 881 88
Other European
countries 567 497 129
Eliminations (134) - -
---------------------------------------------------------------------
8,714 8,653 300 1,285
Rest of World 352 309 12 142
Corporate and Other (138) 7 23 254
---------------------------------------------------------------------
Total reportable
segments $ 19,231 $ 19,231 $ 908 4,203
Current assets 9,024
Investments, goodwill
and other assets 2,286
---------------------------------------------------------------------
Consolidated total assets $ 15,513
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) EBIT represents operating income before interest income or
expense.
16. SUBSEQUENT EVENTS
Subject to approval by the Toronto Stock Exchange ("TSX") and the New
York Stock Exchange ("NYSE"), on November 3, 2008 the Company's Board
of Directors approved the purchase for cancellation and/or for
purposes of the Company's long-term retention (restricted stock),
restricted stock unit and deferred profit sharing programs, up to
11,000,000 Magna Class A Subordinate Voting Shares, representing
approximately 9.9% of the Company's public float of Class A
Subordinate Voting Shares, pursuant to a normal course issuer bid.
The normal course issuer bid is expected to commence on or about
November 12, 2008 and will terminate one year later. All purchases of
Class A Subordinate Voting Shares will be made at the market price at
the time of purchase in accordance with the rules and policies of the
TSX and the NYSE, including Rule 10b-18 under the U.S. Securities
Exchange Act of 1934.
17. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
to the current period's method of presentation.
For further information: Louis Tonelli, Vice-President, Investor
Relations at (905) 726-7035; For teleconferencing questions, please contact
Karin Kaminski at (905) 726-7103
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