AURORA, ON, Feb. 27 /CNW/ - Magna International Inc. (TSX: MG.A, MG.B;
NYSE: MGA) today reported financial results for the fourth quarter and year
ended December 31, 2006.-------------------------------------------------------------------------
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Sales $ 6,368 $ 5,854 $ 24,180 $ 22,811
Operating income $ 42 $ 125 $ 792 $ 942
Net income $ 29 $ 83 $ 528 $ 639
Diluted earnings
per share $ 0.26 $ 0.75 $ 4.78 $ 5.90
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All results are reported in millions of U.S. dollars, except
per share figures.
-------------------------------------------------------------------------YEAR ENDED DECEMBER 31, 2006
We posted sales of $24.2 billion for 2006, an increase of 6% over 2005.
This higher sales level was achieved as a result of increases in our North
American, European and Rest of World production sales, our complete vehicle
assembly sales, and our tooling, engineering and other sales.
During 2006, North American and European average dollar content per
vehicle increased 6% and 14% respectively, over 2005. During 2006, North
American and European vehicle production declined 2% and 3% respectively,
compared to 2005.
Complete vehicle assembly sales increased 7% to $4.4 billion for 2006
compared to $4.1 billion for 2005 and complete vehicle assembly volumes
increased 8% to approximately 248,000 units.
Our operating income was $792 million for 2006 compared to $942 million
for 2005, and we earned net income for 2006 of $528 million compared to
$639 million for 2005. Diluted earnings per share were $4.78 for 2006 compared
to $5.90 for 2005.
During 2006, we generated cash from operations before changes in non cash
operating assets and liabilities of $1.44 billion, and generated $157 million
from non cash operating assets and liabilities. Total investment activities
for 2006 were $1.18 billion, including $793 million in fixed asset additions,
$284 million to purchase subsidiaries, and a $99 million increase in
investments and other assets.
THREE MONTHS ENDED DECEMBER 31, 2006
------------------------------------
We posted sales of $6.4 billion for the fourth quarter ended December 31,
2006, an increase of 9% over the fourth quarter of 2005. This higher sales
level was achieved as a result of increases in our European and Rest of World
production sales, complete vehicle assembly sales, and tooling, engineering
and other sales, offset in part by a reduction in our North American
production sales.
During the fourth quarter of 2006, North American and European average
dollar content per vehicle increased 5% and 24% respectively, over the
comparable quarter in 2005. During the fourth quarter of 2006, North American
and European vehicle production declined 8% and 2% respectively, compared to
the fourth quarter of 2005.
Complete vehicle assembly sales increased 19% to $1.25 billion for the
fourth quarter of 2006 compared to $1.05 billion for the fourth quarter of
2005 while complete vehicle assembly volumes were essentially unchanged.
Our operating income was $42 million for the three months ended
December 31, 2006 compared to $125 million for the three months ended
December 31, 2005, and we earned net income for the fourth quarter of 2006 of
$29 million compared to $83 million for the fourth quarter of 2005. Diluted
earnings per share were $0.26 for the fourth quarter of 2006 compared to $0.75
for the fourth quarter of 2005.
During the three months ended December 31, 2006, we generated cash from
operations before changes in non cash operating assets and liabilities of
$324 million, and generated $474 million from non cash operating assets and
liabilities. Total investment activities for the fourth quarter of 2006 were
$320 million, including $249 million in fixed asset additions, $30 million to
purchase subsidiaries, and a $41 million increase in investments and other
assets.
IMPAIRMENT CHARGES, RESTRUCTURING CHARGES AND OTHER CHARGES AND GAINS
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During the years ended December 31, 2006 and 2005, we recorded a number
of unusual items, including impairment charges associated with long-lived
assets and goodwill, restructuring charges associated with our assessment of
our global operating structure and capacity, and other charges and gains.
For the years ended December 31, 2006 and 2005, the aggregate net charge
before income taxes and minority interest for unusual items totalled
$148 million and $145 million, respectively. On a per share basis, the
aggregate net charge for unusual items was $1.04 and $1.05 in 2006 and 2005,
respectively.
For the fourth quarters of 2006 and 2005, the aggregate net charge before
income taxes for unusual items was $91 million and $157 million, respectively.
On a per share basis, the aggregate net charge for unusual items was $0.73 and
$1.07 in the fourth quarters of 2006 and 2005, respectively.
A more detailed discussion of our consolidated financial results for the
fourth quarter and year ended December 31, 2006 is contained in the
Management's Discussion and Analysis of Results of Operations and Financial
Position, and the unaudited interim consolidated financial statements and
notes thereto, which are attached to this Press Release.
DIVIDEND
--------
Our Board of Directors yesterday declared a quarterly dividend with
respect to our outstanding Class A Subordinate Voting Shares and Class B
Shares for the quarter ended December 31, 2006. The dividend of U.S. $0.19 per
share is payable on March 23, 2007 to shareholders of record on March 13,
2007.
Vince Galifi, our Executive Vice President and Chief Financial Officer,
said: "The difficult automotive environment during 2006, particularly in North
America, took its toll on our 2006 financial results. We believe it is prudent
to review all uses of cash with an eye to maintaining our strong financial
position in light of continuing industry challenges. Our Board's decision to
adjust our dividend as a result of our reduction in profitability reflects
this view."
UPDATED 2007 OUTLOOK
--------------------
For the full year 2007, we expect consolidated sales to be between
$22.9 billion and $24.2 billion, based on full year 2007 light vehicle
production volumes of approximately 15.4 million units in North America and
approximately 15.5 million units in Europe. Full year 2007 average dollar
content per vehicle is expected to be between $770 and $800 in North America
and between $375 and $400 in Europe. We expect full year 2007 complete vehicle
assembly sales to be between $3.5 billion and $3.8 billion.
In addition, we expect that full year 2007 spending for fixed assets will
be in the range of $800 million to $850 million.
In our 2007 outlook we have assumed no significant acquisitions or
divestitures, and no significant labour disruptions in our principal markets.
In addition, we have assumed that foreign exchange rates for the most common
currencies in which we conduct business relative to our U.S. dollar reporting
currency will approximate current rates as of today's date.
We are the most diversified automotive supplier in the world. We design,
develop and manufacture automotive systems, assemblies, modules and
components, and engineer and assemble complete vehicles, primarily for sale to
original equipment manufacturers of cars and light trucks in North America,
Europe, Asia, South America and Africa. Our capabilities include the design,
engineering, testing and manufacture of automotive interior systems, seating
systems, closure systems; metal body and structural systems; vision and
engineered glass systems; plastic body, lighting and exterior trim systems,
various powertrain and drivetrain systems; retractable hard top and soft top
roof systems; as well as complete vehicle engineering and assembly.
We have approximately 83,000 employees in 229 manufacturing operations
and 62 product development and engineering centres in 23 countries.
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We will hold a conference call for interested analysts and shareholders
to discuss our fourth quarter results on Tuesday, February 27, 2007 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 1 800 377 5794. The number for overseas callers is 1 416
620 2415. 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 call 905-726 7103.
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FORWARD-LOOKING STATEMENTS
--------------------------
The previous discussion may contain statements that, to the extent that
they are not recitations of historical fact, constitute "forward-looking
statements" within the meaning of applicable securities legislation. Forward-
looking statements may include financial and other projections, as well as
statements regarding our future plans, objectives or economic performance, or
the assumptions underlying any of the foregoing. We use words such as "may",
"would", "could", "will", "likely", "expect", "anticipate", "believe",
"intend", "plan", "forecast", "project", "estimate" and similar expressions to
identify forward-looking statements. Any such forward-looking statements are
based on assumptions and analyses made by us in light of our experience and
our perception of historical trends, current conditions and expected future
developments, as well as other factors we believe are appropriate in the
circumstances. However, whether actual results and developments will conform
with our expectations and predictions is subject to a number of risks,
assumptions and uncertainties. These risks, assumptions and uncertainties
include, but are not limited to, the impact of: declining production volumes
and changes in consumer demand for vehicles; a reduction in the production
volumes of certain vehicles, such as certain light trucks; our ability to
offset increases in the cost of commodities, such as steel and resins, as well
as energy prices; fluctuations in relative currency values; our ability to
offset price concessions demanded by our customers; our 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; the termination by
our customers of any material contracts; product liability claims in excess of
our insurance coverage; expenses related to the restructuring and
rationalization of some of our operations; impairment charges; our ability to
successfully identify, complete and integrate acquisitions; risks associated
with new program launches; legal claims against us; risks of conducting
business in foreign countries; unionization activities at our facilities; work
stoppages and labour relations disputes; changes in laws and governmental
regulations; costs associated with compliance with environmental laws and
regulations; potential conflicts of interest involving our controlling
shareholder, the Stronach Trust; and other factors set out in our Annual
Information Form filed with securities commissions in Canada and our annual
report on Form 40-F filed with the United States Securities and Exchange
Commission, and subsequent filings. In evaluating forward-looking statements,
readers should specifically consider the various factors which could cause
actual events or results to differ materially from those indicated by such
forward-looking statements. Unless otherwise required by applicable securities
laws, we do not intend, nor do we undertake any obligation, to update or
revise any forward-looking statements to reflect subsequent information,
events, results or circumstances or otherwise.
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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 year ended
December 31, 2006 included in this Press Release, and the audited consolidated
financial statements and MD&A for the year ended December 31, 2005 included in
our 2005 Annual Report to Shareholders. The unaudited interim consolidated
financial statements for the three months and year ended December 31, 2006 and
the audited consolidated financial statements for the year ended December 31,
2005 were both prepared in accordance with Canadian generally accepted
accounting principles.
This MD&A has been prepared as at February 26, 2007.
OVERVIEW
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We are a leading global supplier of technologically advanced automotive
systems, assemblies, modules and components. We follow a corporate policy of
functional and operational decentralization. We conduct our operations through
divisions, each of which is an autonomous business unit operating within pre-
determined guidelines. As at December 31, 2006, we had 229 manufacturing
divisions and 62 product development and engineering centres in 23 countries.
We design, develop and manufacture automotive systems, assemblies, modules and
components, and engineer and assemble complete vehicles, primarily for sale to
original equipment manufacturers ("OEMs") of cars and light trucks in North
America, Europe, Asia, South America and Africa. Our product capabilities span
a number of major automotive areas including: interiors; seating; closures;
metal body and structural systems; vision and engineered glass systems;
electronics; plastic body, lighting and exterior trim systems; various
powertrain and drivetrain systems; retractable hard top and soft top roof
systems; and complete vehicle engineering and assembly.
During 2005, we completed the privatizations of our former public
subsidiaries: Tesma International Inc. ("Tesma"); Decoma International Inc.
("Decoma"); and Intier Automotive Inc. ("Intier") (the "Privatizations"). The
Privatizations have allowed us to: improve our strategic positioning,
particularly with respect to the development of vehicle modules that cross our
traditional product lines; better exploit our various competencies,
particularly our complete vehicle expertise; and achieve various other
efficiencies.
Our operations are segmented on a geographic basis between North America,
Europe, and Rest of World (primarily Asia and South America). A co-Chief
Executive Officer heads management in each of our two primary markets, North
America and Europe. The role of the North American and European management
teams is to manage our interests to ensure a coordinated effort across our
different product capabilities. In addition to maintaining key customer,
supplier and government contacts in their respective markets, our regional
management teams centrally manage key aspects of our operations while
permitting our divisions enough flexibility through our decentralized
structure to foster an entrepreneurial environment.
Our success is primarily dependent upon the levels of North American and
European car and light truck production by our customers and the relative
amount of content we have on the various programs. OEM production volumes in
different regions may be impacted by factors which may vary from one region to
the next, including general economic and political conditions, interest rates,
energy and fuel prices, international conflicts, labour relations issues,
regulatory requirements, trade agreements, infrastructure, legislative
changes, environmental emission and safety issues. A number of other factors,
discussed below under "Industry Trends and Risks" also affect our success,
including such things as relative currency values, commodities prices, price
reduction pressures from our customers, the financial condition of our supply
base and competition from manufacturers with operations in low cost countries.
HIGHLIGHTS
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During 2006, we recorded sales of $24.2 billion, an increase of 6% over
2005. This higher sales level was achieved as a result of growth in our North
American and European dollar content per vehicle of 6% and 14%, respectively,
and increases in Rest of World production sales, complete vehicle assembly
sales, and tooling, engineering and other sales.
These increases were offset in part by reductions in North American and
European vehicle production levels of 2% and 3%, respectively. More
importantly, during 2006 our largest OEM customers in North America
significantly reduced vehicle production levels, particularly on certain light
truck programs. While overall North American vehicle production volumes
declined 2% in 2006 compared to 2005, General Motors ("GM"), Ford and Chrysler
light truck production declined 6%, 18% and 10%, respectively. These declines
were even more pronounced during the second half of 2006, with production
declines on GM, Ford and Chrysler light truck programs of 14%, 28% and 13%,
respectively, a period when overall North American vehicle production volumes
declined 7%.
The production declines reflect a number of factors that continue to
impact our largest customers in North America, including declining market
share, high inventory levels on certain vehicles, and a shift in consumer
preferences away from light trucks. The lower production levels at our largest
OEM customers, particularly for certain light trucks, negatively impacted our
sales and earnings, as our content on a number of these programs is higher
than our consolidated average dollar content per vehicle in North America.
Operating income for 2006 decreased 16% or $150 million to $792 million
from $942 million for 2005. Excluding the unusual items recorded in 2006 and
2005 (see "Unusual Items" below), operating income for 2006 decreased
$147 million or 14%. The decrease in operating income excluding unusual items
was primarily due to a substantial underperformance at most of our interior
systems facilities, operational inefficiencies and other costs at certain
facilities, costs associated with the cancellation of the Ford Freestar and
Mercury Monterey minivan program, an accrual of the minimum required payment
under our Employee Equity and Profit Participation Program ("EEPPP"), lower
sales on certain higher content programs in North America, as well as
incremental customer price concessions. These factors were partially offset by
additional margins earned on the launch of new programs during or subsequent
to 2005, lower warranty costs, increased margins earned on higher volumes for
certain assembly programs, the acquisition of CTS Fahrzeug-Dachsysteme GmbH,
Beitingheim-Bissingen ("CTS"), and the closure, during or subsequent to 2005,
of certain underperforming divisions that were incurring losses.
Net income for 2006 decreased 17% or $111 million to $528 million from
$639 million for 2005. Excluding the unusual items recorded in 2006 and 2005
(see "Unusual Items" below), net income for 2006 decreased 15% or
$110 million. The decrease in net income excluding unusual items was primarily
a result of the decrease in operating income (excluding unusual items)
partially offset by lower income taxes (excluding unusual items) and lower
minority interest expense. Income taxes were lower despite the negative impact
of an unfavourable tax decision (see "Incomes Taxes" below).
Diluted earnings per share for 2006 decreased 19% or $1.12 to $4.78 from
$5.90 for 2005. Excluding the unusual items recorded in 2006 and 2005 (see
"Unusual Items" below), diluted earnings per share decreased 16% or $1.13
primarily as a result of the decrease in net income (excluding unusual items)
and an increase in the weighted average number of diluted shares outstanding
in 2006, primarily as a result of the Class A Subordinate Voting Shares issued
in 2005 on completion of the Privatizations.Unusual Items
During 2006 and 2005, we recorded certain unusual items as follows:
2006 2005
----------------------------- ----------------------------
Diluted Diluted
Operating Net Earnings Operating Net Earnings
Income Income per Share Income Income per Share
-------------------------------------------------------------------------
Impairment
charges(1) $ (54) $ (46) $ (0.41) $ (131) $ (98) $ (0.90)
Restructuring
charges(2) (77) (65) (0.58) (59) (48) (0.44)
Sale of
facilities(3) (17) (15) (0.14) 16 10 0.09
Future tax
recovery(5) - 10 0.09 - - -
Charges
associated
with
MG Rover(4) - - - (15) (13) (0.12)
Settlement
gain(5) - - - 26 16 0.15
Foreign
currency
gain(5) - - - 18 18 0.17
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Total unusual
items $ (148) $ (116) $ (1.04) $ (145) $ (115) $ (1.05)
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(1) Impairment Charges
In conjunction with our annual goodwill impairment analysis and
consideration of other indicators of impairment of our long-lived
assets at certain operations, we have recorded impairment charges as
follows:
2006 2005
------------------------ ------------------------
Operating Net Operating Net
Income Income Income Income
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(a) Long-lived asset
impairments:
Europe $ 41 $ 38 $ 89 $ 63
North America 13 8 21 14
(b) Goodwill
impairment:
Europe - - 21 21
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$ 54 $ 46 $ 131 $ 98
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(a) Long-lived assets impairments
Europe
During 2006, we recorded asset impairments of $41 million
relating to certain assets and facilities due to recurring losses
that were projected to continue as a result of existing sales
levels and limited sales growth prospects. Asset impairments were
recorded as follows:
Germany (exterior systems) $ 18
Austria (powertrain systems) 11
United Kingdom (interior systems) 8
Czech Republic (seating systems) 2
Spain (interior systems) 2
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$ 41
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During 2005, we recorded asset impairments of $89 million in
Europe relating to certain exterior systems facilities in the
United Kingdom, Belgium and Germany, and a closure systems
facility in the Czech Republic.
North America
During 2006, we identified issues relating to certain interior
systems facilities in the United States, including projected
losses throughout our business planning period as a result of
existing and forecasted sales levels. As a result, we recorded
asset impairments of $13 million relating to certain assets at
these facilities.
During 2005, we recorded asset impairments of $21 million related
to an exterior systems facility in Canada and certain powertrain
facilities in the United States.
(b) Goodwill impairment
In conjunction with our annual business planning cycle, we
completed our goodwill impairment analysis. As a result of this
analysis, no goodwill impairment charge was recorded during 2006.
During 2005, we recorded a $21 million goodwill impairment charge
related to our exterior systems reporting unit in Europe.
(2) Restructuring Charges
Europe
In Europe, restructuring charges totalled $43 million for 2006
compared to $33 million for 2005. Specifically, we recorded a
$24 million charge related to the planned closure of a mirrors
facility in Ireland and an $11 million charge related to the closure
of an exterior systems facility in Belgium.
The restructuring charges in 2005 related primarily to severance
costs at a mirrors facility in Ireland, an exterior systems facility
in Belgium, and an engineering centre in France.
North America
In North America, restructuring charges totalled $34 million for 2006
compared to $21 million for 2005. Specifically, we recorded a
$22 million charge as a result of an agreement we reached with
employees related to rightsizing a powertrain facility in the United
States. The balance of restructuring and rationalization charges
related primarily to certain powertrain and seating facilities in the
United States.
The restructuring charges in 2005 related primarily to severance
costs incurred as a result of the Privatizations and the
consolidation and/or closure of certain exterior systems, powertrain
and stampings facilities in Canada and the United States.
In addition, we expect to incur additional restructuring and
rationalization charges during 2007.
(3) Sale of Facilities
During 2006, we entered into agreements for the sale of two
underperforming powertrain facilities. As a result, we incurred
losses on disposition of the facilities of $12 million and $5 million
in Europe and North America, respectively. During 2005, we recorded a
$16 million gain on sale of a non-core seat component facility in
North America.
(4) MG Rover
In April 2005, MG Rover Group Limited ("MG Rover") was placed into
administration, which is similar to Chapter 11 bankruptcy protection
in the United States (the "MG Rover situation"). As a result, we
recorded charges of $15 million related to our MG Rover assets and
supplier obligations during 2005.
(5) Other Unusual Items
During 2006 we recorded a $10 million future income tax recovery as a
result of a reduction in future income tax rates in Canada.
During 2005 we also recorded the following unusual items:
- the receipt of $26 million awarded by a court in a lawsuit
commenced by us in 1998 in respect of defective materials
installed by a supplier in a real estate project; and
- an $18 million foreign currency gain on the repatriation of funds
from Europe.Key Achievements
During 2006, in addition to managing the significant industry challenges
facing the automotive supply base, we achieved the following:
Continued Geographic Diversification
We continued to expand our presence outside of our traditional markets of
North America and Western Europe. Rest of World production sales grew 57% in
2006 to $269 million, and have nearly doubled since 2004. As a result of our
continued investments in markets such as China, Korea and India, we expect
continued growth in our Rest of World sales over the next few years. In
addition, we continue to invest and seek business opportunities in Central and
Eastern Europe, in order to further grow our presence globally.
J.D. Power Award
Magna Steyr's vehicle assembly facility in Graz, Austria was awarded a
J.D. Power Gold Plant Quality Award in Europe. It is the first time this award
has been given to an automotive supplier. The award recognizes that our Graz
facility produces vehicles with the fewest number of defects as compared to
other European assembly facilities. This is a remarkable achievement,
considering the complexity involved in building eight different vehicles, for
three different customers, at one vehicle assembly location.
Acquisition of Car Top Systems
In February 2006, we purchased CTS from Porsche AG. CTS is one of the
world's leading manufacturers of retractable hard top and soft top roof
systems, a product area that we believe has good growth potential. The
acquisition allows us to leverage our closure systems and complete vehicle
capabilities to improve our offerings to our customers.
Investment in Shin Young Metal
We acquired a 41% interest in Shin Young Metal Co. ("Shin Young"), a
Korean-based supplier of major stampings, welded assemblies and tooling. Shin
Young operates five manufacturing sites in Korea, and is a Tier 1 supplier to
Hyundai. Hyundai and Shin Young also jointly own a facility in Alabama. We
anticipate that this investment may provide us opportunities for new business
in Korea and elsewhere in the world, as Hyundai continues to expand globally.
Ford World Excellence Awards
Six of our operating divisions were awarded the Ford Motor Company World
Excellence Awards for exemplary performance. The six awards were the most
given to any one supplier, out of a total of 60 World Excellence Awards
presented to Ford's suppliers globally.
Toledo Paint Shop
We collaborated with Chrysler Group in their Supplier Park project in
Toledo, Ohio. Our Magna Steyr unit manages and operates the paint shop
facility for Chrysler Group's new Toledo South Assembly Plant, which started
production of the 2007 Jeep Wrangler during 2006. Operating the paint shop
facility builds on our relationship with Chrysler in producing complete
vehicles, and strengthens Magna Steyr's capabilities in North America.
INDUSTRY TRENDS AND RISKS
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A number of trends have had a significant impact on the global automotive
industry in recent years, including:- the growth of Asian-based OEMs in North America and Europe and
declining market share at certain of our customers in our traditional
markets;
- increased pressure by OEMs on automotive suppliers to bear additional
costs and reduce their prices, including though retroactive price
reductions;
- elevated raw materials and commodity prices, such as steel and resin,
as well as energy prices;
- the deterioration of the financial condition of the automotive supply
base and certain OEMs;
- the growth of the automotive industry in China, Korea, India and
other Asian countries, as well as parts of eastern Europe, and the
migration of manufacturing to such lower cost countries;
- increased engineering capabilities required in order to be awarded
new business for more complex systems and modules;
- increased outsourcing of larger modules;
- increased prevalence of vehicles built off high-volume global vehicle
platforms; and
- increased customer and consumer demand for lighter, more fuel-
efficient vehicles, additional safety features, improved comfort,
convenience and space optimization features, alternative fuel systems
and advanced electronics systems.
The following are some of the more significant risks that could affect our
ability to achieve our desired results:
- The global automotive industry is cyclical and consumer demand for
automobiles is sensitive to changes in certain economic and political
conditions, including interest rates, energy prices and international
conflicts (including acts of terrorism). Automotive sales and
production can also be affected by other factors, including labour
relations issues, regulatory requirements and trade agreements. In
North America, the industry is characterized by significant
overcapacity, fierce competition and significant pension and other
post employment benefit costs for the domestic OEMs. In Europe, the
market structure is relatively fragmented and is also characterized
by significant overcapacity and fierce competition. As a result of
these and other conditions, some of our customers are currently
experiencing or may in the future experience reduced consumer demand
for their vehicles, leading to declining vehicle production volumes.
A reduction in vehicle production volumes by any of our significant
customers could have a material adverse effect on our profitability.
- Rising healthcare, pension and other post-employment benefit costs
are having a significant adverse effect on the profitability and
competitiveness of a number of North American and European OEMs and
automotive component suppliers. Increased raw materials prices,
including steel and resins, and energy prices are also adversely
affecting OEMs and automotive component suppliers. Other economic
conditions, such as increased gas prices, have affected and could
further threaten sales of certain models, such as full-size sport
utility vehicles and light trucks. All of these conditions, coupled
with a continued decline in market share, could further threaten the
financial condition of some of our customers, putting additional
pressure on us to reduce our prices and exposing us to greater credit
risk. In the event that our customers are unable to satisfy their
financial obligations or seek protection from their creditors, we may
incur additional expenses as a result of such credit exposure, which
could have a material adverse effect on our profitability and
financial condition.
- Although we supply parts to all of the leading OEMs, a significant
majority of our sales are to four such customers, two of which are
rated as below investment grade by credit rating agencies. We are
attempting to further diversify our customer base, particularly to
increase our business with Asian based OEMs. A decline in overall
production volumes by any of our four largest customers could have an
adverse effect on our profitability, particularly if we are unable to
further diversify our customer base. Moreover, while we supply parts
for a wide variety of vehicles produced in North America and Europe,
we do not supply parts for all vehicles produced, nor is the number
or value of parts evenly distributed among the vehicles for which we
do supply parts. Shifts in market share among vehicles (including
shifts away from vehicles we assemble) or the early termination,
loss, renegotiation of the terms of, or delay in, the implementation
of any significant production or assembly contract could have an
adverse effect on our profitability.
- We are dependent on outsourcing of components, modules and
assemblies, as well as complete vehicles, by OEMs. The extent of OEM
outsourcing is influenced by a number of factors, including relative
cost, quality and timeliness of production by suppliers as compared
to OEMs, capacity utilization, and labour relations among OEMs, their
employees and unions. In the case of outsourcing of complete vehicle
assembly, the extent of outsourcing is particularly dependent on the
degree of unutilized capacity at the OEMs' own assembly facilities,
in addition to the foregoing factors. A reduction in outsourcing by
OEMs, or the loss of any material production or assembly programs
coupled with the failure to secure alternative programs with
sufficient volumes and margins, could have a material adverse effect
on our profitability.
- The competitive environment in the automotive industry has been
intensifying as our customers seek to take advantage of lower
operating costs in China, Korea, India and other countries in Asia,
as well as parts of Eastern Europe. As a result, we are facing
increased competition from suppliers that have manufacturing
operations in low cost countries. While we continue to expand our
manufacturing footprint with a view to taking advantage of
manufacturing opportunities in low cost countries, we cannot
guarantee that we will be able to fully realize such opportunities.
Additionally, the establishment of manufacturing operations in
emerging market countries carries its own risks, including those
relating to political and economic instability; trade, customs and
tax risks; currency exchange rates; currency controls;
insufficient infrastructure; and other risks associated with
conducting business internationally. The loss of any significant
production contract to a competitor in low cost countries or
significant costs and risks incurred to enter and carry on
business in these countries could have an adverse effect on our
profitability.
- Prices for key commodities used in our parts production, particularly
steel and resin, remain at elevated levels with the possibility of
future increases in some commodities. We expect steel prices will
remain at elevated levels in 2007 compared to levels earlier this
decade. Approximately half of our steel is acquired through resale
programs operated by the OEMs, which do not expose us to steel price
increases, and the balance is acquired through spot, short-term and
long-term contracts. However, a steel supplier has challenged its
long-term agreements with us for certain steel products while steel
prices were rising and, to the extent that it successfully disputes,
terminates or otherwise refuses to honour its contracts, our maximum
potential exposure as at December 31, 2006 would be less than
$135 million and we will have future exposure to steel price
increases to the extent that steel prices remain at elevated levels.
We also sell scrap steel, which is generated through our parts
production process, and the revenues from these sales have reduced
some of our exposure to steel price increases in the past. However,
if scrap steel prices decline, while steel prices remain high, our
ability to reduce our exposure to steel price increases will
diminish. To the extent we are unable to fully mitigate our exposure
to increased commodity prices through hedging strategies, by
engineering products with reduced steel, resin or other commodity
content, or by passing additional steel and resin costs to our
customers, such additional commodity costs could have a material
adverse effect on our profitability.
- We rely on a number of suppliers to supply us with a wide range of
components required in connection with our business. Economic
conditions, intense pricing pressures, increased commodity prices and
a number of other factors have left many automotive suppliers in
varying degrees of financial distress. The continued financial
distress or the insolvency or bankruptcy of one of our major
suppliers could disrupt the supply of components to us from these
suppliers, possibly resulting in a temporary disruption in the supply
of products by us to our customers. Additionally, the financial
distress or the insolvency or bankruptcy of a significant supplier to
one of our customers could disrupt the supply of products to such
customer, resulting in a reduction in production by our customer.
Such a reduction in our customer's production could negatively impact
our production, resulting in unrecoverable losses. Any prolonged
disruption in the supply of critical components by our suppliers or
suppliers to one of our customers, the inability to re-source
production of a critical component from a financially distressed
automotive components sub-supplier, or any temporary shut-down of one
of our production lines or the production lines of our customers,
could have a material adverse effect on our profitability.
Additionally, the insolvency, bankruptcy or financial restructuring
of any of our critical suppliers could result in us incurring
unrecoverable costs related to the financial work-out of such
suppliers and/or increased exposure for product liability, warranty
or recall costs relating to the components supplied by such suppliers
to the extent such suppliers are not able to assume responsibility
for such amounts, which could have an adverse effect on our
profitability.
- We have entered into, and will continue to enter into, long-term
supply arrangements with our customers which provide for, among other
things, price concessions over a pre-defined supply term. To date,
these concessions have been fully or partially offset by cost
reductions arising principally from product and process improvements
and price reductions from our suppliers. However, the competitive
automotive industry environment in North America, Europe and Asia has
caused these pricing pressures to intensify. Some of our customers
have demanded, and in light of challenging automotive industry
conditions may continue to demand, additional price concessions
and/or retroactive price reductions. We may not be successful in
offsetting all of these price concessions or reductions through
improved operating efficiencies, reduced expenditures or reduced
prices from our suppliers. To the extent that we are not able to
offset price concessions through cost reductions or improved
operating efficiencies, such concessions could have a material
adverse effect on our profitability.
- Although our financial results are reported in U.S. dollars, a
significant portion of our sales and operating costs are realized in
Canadian dollars, euros, British pounds and other currencies. Our
profitability is affected by movements of the U.S. dollar against the
Canadian dollar, the euro, the British pound and other currencies in
which we generate revenues and incur expenses. However, as a result
of hedging programs employed by us, primarily in Canada, foreign
currency transactions are not fully impacted by the recent movements
in exchange rates. We record foreign currency transactions at the
hedged rate where applicable. Despite these measures, significant
long-term fluctuations in relative currency values, in particular a
significant change in the relative values of the U.S. dollar,
Canadian dollar, euro or British pound, could have an adverse effect
on our profitability and financial condition.
- We continue to be pressured to absorb costs related to product
design, engineering and tooling, as well as other items previously
paid for directly by OEMs. In particular, some OEMs have requested
that we pay for design, engineering and tooling costs that are
incurred up to the start of production and recover these costs
through amortization in the piece price of the applicable component.
Some of these costs cannot be capitalized, which could have an
adverse effect on our profitability until the programs in respect of
which they have been incurred are launched. In addition, since our
contracts generally do not include any guaranteed minimum purchase
requirements, if estimated production volumes are not achieved, these
costs may not be fully recovered, which could have an adverse effect
on our profitability.
- Our customers continue to demand that we bear the cost of the repair
and replacement of defective products which are either covered under
their warranty or are the subject of a recall by them. If our
products are, or are alleged to be, defective, we may be required to
participate in a recall of those products, particularly if the actual
or alleged defect relates to vehicle safety. Warranty provisions are
established based on our best estimate of the amounts necessary to
settle existing or probable claims on product defect issues. Recall
costs are costs incurred when government regulators and/or our
customers decide to recall a product due to a known or suspected
performance issue, and we are required to participate either
voluntarily or involuntarily. Costs typically include the cost of the
product being replaced, the customer's cost of the recall and labour
to remove and replace the defective part. We continue to experience
increased customer pressure to assume greater warranty
responsibility. Currently, under most customer agreements, we only
account for existing or probable claims. Under certain complete
vehicle engineering and assembly contracts, we record an estimate of
future warranty-related costs based on the terms of the specific
customer agreements, and the specific customer's warranty experience.
The obligation to repair or replace such products could have a
material adverse effect on our profitability and financial condition
if the actual costs are materially different from such estimates.
- Contracts from our customers consist of blanket purchase orders which
generally provide for the supply of a customer's annual requirements
for a particular vehicle, instead of a specified quantity of
products. These blanket purchase orders can be terminated by a
customer at any time and, if terminated, could result in us incurring
various pre-production, engineering and other costs which we may not
recover from our customer and which could have an adverse effect on
our profitability.
- We are also subject to the risk of exposure to product liability
claims in the event that the failure of our products results in
bodily injury and/or property damage. Currently, we have third party
liability coverage under insurance policies. This coverage will
continue until August 2007 and is subject to renewal on an annual
basis. A successful claim against us in excess of our available
insurance coverage could have an adverse effect on our profitability
and financial condition.
- In response to the increasingly competitive automotive industry
conditions, it is likely that we may further rationalize some of our
production facilities. In the course of such rationalization, we will
incur further costs related to plant closings, relocations and
employee severance costs. Such costs could have an adverse effect on
our short-term profitability. In addition, we are working to turn
around financially underperforming divisions, however, there is no
guarantee that we will be successful in doing so with respect to some
or all such divisions.
- We recorded significant impairment charges in 2006 and may do so in
2007 and beyond. Goodwill must be tested for impairment annually, or
more frequently when an event occurs that more likely than not
reduces the fair value of a reporting unit below its carrying value.
We also evaluate fixed assets and other long-lived assets for
impairment whenever indicators of impairment exist. The bankruptcy of
a significant customer or the early termination, loss, renegotiation
of the terms of, or delay in the implementation of any significant
production contract could be indicators of impairment. In addition,
to the extent that forward-looking assumptions regarding the impact
of improvement plans on current operations, in-sourcing and other new
business opportunities, program price and cost assumptions on current
and future business, the timing of new program launches and future
forecasted production volumes are not met, any resulting impairment
loss could have a material adverse effect on our profitability.
- We have completed a number of significant acquisitions in recent
years and may continue to do so in the future. In those product areas
in which we have identified acquisitions as critical to our business
strategy, we may not be able to identify suitable acquisition targets
or successfully acquire any suitable targets which we identify.
Additionally, we may not be able to successfully integrate or achieve
anticipated synergies from those acquisitions which we do complete
and such failure could have a material adverse effect on our
profitability.
- From time to time, we are awarded new or takeover business by our
customers. The launch of new business is a complex process, the
success of which is dependent on a wide range of factors, including
the production readiness of manufacturing space, as well as issues
relating to manufacturing processes, tooling, equipment and sub-
suppliers. Our failure to successfully launch material new or
takeover business could have an adverse effect on our profitability.
- From time to time, we may become liable for legal, contractual and
other claims by various parties, including, customers, suppliers,
former employees, class action plaintiffs and others. On an ongoing
basis, we attempt to assess the likelihood of any adverse judgments
or outcomes to these claims, although it is difficult to predict
final outcomes with any degree of certainty. At this time, we do not
believe that any of the claims which we are party to will have a
material adverse effect on our financial position, however, we cannot
provide any assurance to this effect.
RESULTS OF OPERATIONS
-------------------------------------------------------------------------
Average Foreign Exchange
For the three months For the year
ended December 31, ended December 31,
---------------------------- ----------------------------
2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
1 Canadian
dollar equals
U.S. dollars 0.877 0.853 + 3% 0.882 0.826 + 7%
1 euro equals
U.S. dollars 1.292 1.188 + 9% 1.257 1.244 + 1%
1 British
pound equals
U.S. dollars 1.920 1.747 + 10% 1.845 1.819 + 1%
-------------------------------------------------------------------------The preceding table reflects the average foreign exchange rates between
the most common currencies in which we conduct business and our U.S. dollar
reporting currency. The significant changes in these foreign exchange rates
for the three months and year ended December 31, 2006 impacted the reported
U.S. dollar amounts of our sales, expenses and income.
The results of operations whose functional currency is not the U.S.
dollar are translated into U.S. dollars using the average exchange rates in
the table above for the relevant period. Throughout this MD&A, reference is
made to the impact of translation of foreign operations on reported U.S.
dollar amounts where relevant.
Our results can also be affected by the impact of movements in exchange
rates on foreign currency transactions (such as raw material purchases or
sales denominated in foreign currencies). However, as a result of hedging
programs employed by us, primarily in Canada, foreign currency transactions in
the current period have not been fully impacted by the recent movements in
exchange rates. We record foreign currency transactions at the hedged rate
where applicable.
Finally, results were impacted by holding gains and losses on foreign
currency denominated monetary items, which were recorded in selling, general
and administrative expenses.RESULTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2006
-------------------------------------------------------------------------
Sales
2006 2005 Change
-------------------------------------------------------------------------
Vehicle Production Volumes
(millions of units)
North America 15.335 15.722 - 2%
Europe 15.536 15.959 - 3%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 775 $ 731 + 6%
Europe $ 362 $ 317 + 14%
-------------------------------------------------------------------------
Sales
External Production
North America $ 11,883 $ 11,499 + 3%
Europe 5,624 5,058 + 11%
Rest of World 269 171 + 57%
Complete Vehicle Assembly 4,378 4,110 + 7%
Tooling, Engineering and Other 2,026 1,973 + 3%
-------------------------------------------------------------------------
Total Sales $ 24,180 $ 22,811 + 6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------Total sales reached a record level, increasing 6% or $1.4 billion to
$24.2 billion for 2006 compared to $22.8 billion for 2005.
External Production Sales - North America
External production sales in North America increased 3% or $384 million
to $11.9 billion for 2006 compared to $11.5 billion for 2005. This increase in
production sales reflects a 6% increase in our North American average dollar
content per vehicle partially offset by a 2% decrease in North American
vehicle production volumes. More importantly, production volumes at our
largest North American customers continued to deteriorate. While North
American vehicle production volumes declined 2% during 2006 compared to 2005,
production volumes at GM, Ford and Chrysler declined 4%, 9% and 8%,
respectively. These declines were even more pronounced during the second half
of 2006, with production declines at GM, Ford and Chrysler of 11%, 17% and
11%, respectively, a period when North American vehicle production volumes
declined 7%.
Our average dollar content per vehicle grew by 6% or $44 to $775 for 2006
compared to $731 for 2005, primarily as a result of:- the launch of new programs during or subsequent to 2005, including:
- GM's next generation full-size pickups and SUVs;
- the Ford Fusion, Mercury Milan and Lincoln Zephyr / MKZ;
- the Chevrolet HHR;
- the Dodge Caliber;
- the Chevrolet Impala;
- the Ford Explorer / Sport Trac and Mercury Mountaineer; and
- the Buick Lucerne;
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar;
- increased production and/or content on certain programs, including:
- the Mercedes M-Class; and
- the BMW Z4; and
- the acquisition of CTS in February 2006.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Dodge Caravan, Grand Caravan and Chrysler Town & Country;
- the Ford Escape, Mercury Mariner and Mazda Tribute;
- the Chevrolet Envoy, Buick Rainier and GMC Trailblazer;
- the Cadillac STS;
- the Ford Freestar and Mercury Monterey;
- the Jeep Grand Cherokee;
- the Chrysler Pacifica;
- the Ford F-Series SuperDuty; and
- the Cadillac CTS;
- programs that ended production during or subsequent to 2005; and
- incremental customer price concessions.External Production Sales - Europe
External production sales in Europe increased 11% or $566 million to
$5.6 billion for 2006 compared to $5.1 billion for 2005. This increase in
production sales reflects a 14% increase in our European average dollar
content per vehicle partially offset by a 3% decline in European vehicle
production volumes.
Our average dollar content per vehicle grew by 14% or $45 to $362 for
2006 compared to $317 for 2005, primarily as a result of:- acquisitions completed during or subsequent to 2005, including CTS in
February 2006;
- the launch of new programs during or subsequent to 2005, including
the Honda Civic;
- increased production and/or content on certain programs, including:
- the Mercedes B-Class; and
- the BMW X3; and
- an increase in reported U.S. dollar sales primarily due to the
strengthening of the euro and British pound against the U.S. dollar.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Mercedes C-Class;
- the Mercedes A-Class;
- the Chrysler Voyager and Grand Voyager; and
- the Nissan Micra;
- programs that ended production during or subsequent to 2005,
including production on all MG Rover programs as a result of the
MG Rover situation; and
- incremental customer price concessions.External Production Sales - Rest of World
External production sales in the Rest of World increased 57% or
$98 million to $269 million for 2006 compared to $171 million for 2005. The
increase in production sales is primarily a result of:- increased production sales at existing facilities in China;
- the ramp-up of production at new facilities in China;
- increased production sales at our powertrain facilities in Korea;
- an increase in production sales at a closures systems facility in
Brazil;
- the acquisition of a mirrors facility in South Africa; and
- an increase in reported U.S. dollar sales due to the strengthening of
the Korean Won and Chinese Renminbi, each against the U.S. dollar.These factors were partially offset by the closure during 2005 of an
exterior systems facility in Brazil and an engineered glass facility in
Malaysia.
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 impact our levels 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 and, 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.2006 2005 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales $ 4,378 $ 4,110 + 7%
-------------------------------------------------------------------------
Complete Vehicle Assembly Volumes
(Units)
Full-Costed: 157,963 151,027 + 5%
BMW X3, Mercedes E-Class and
G-Class, and Saab 9(3)
Convertible
Value-Added: 90,096 79,478 + 13%
Jeep Grand Cherokee,
Chrysler 300, Chrysler
Voyager, and Jeep Commander
-------------------------------------------------------------------------
248,059 230,505 + 8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------Complete vehicle assembly volumes increased 8% to 248,059 units for 2006
compared to 230,505 units for 2005. Complete vehicle assembly sales increased
7% or $268 million to $4.4 billion for 2006 compared to $4.1 billion for 2005.
The increase in complete vehicle assembly sales is primarily the result of:- the increase in assembly volumes for:
- the BMW X3; and
- the Saab 9(3) Convertible;
- the launch of assembly programs during or subsequent to 2005,
including:
- the Chrysler 300 in the second quarter of 2005; and
- the Jeep Commander in the first quarter of 2006; and
- an increase in reported U.S. dollar sales as a result of the
strengthening of the euro against the U.S. dollar.
These increases were partially offset by a decrease in assembly volumes
for:
- the Mercedes G-Class;
- the Mercedes E-Class 4MATIC;
- the Chrysler Voyager; and
- the Jeep Grand Cherokee.The fourth quarter of 2006 marked the end of production for the Mercedes
E-Class 4MATIC at our Graz vehicle assembly facility, as DaimlerChrysler will
assemble this vehicle in-house.
Tooling, Engineering and Other
Tooling, engineering and other sales increased 3% or $53 million to
$2.03 billion for 2006 compared to $1.97 billion for 2005. The increase in
tooling, engineering and other sales is primarily as a result of the
strengthening of the Canadian dollar, euro and British Pound, each against the
U.S. dollar. The sustained level of tooling, engineering and other sales
reflects our continued involvement in new production programs.
In 2006, the major programs for which we recorded tooling, engineering
and other sales were:- GM's next generation full-size pickups and SUVs;
- the MINI Cooper;
- the Ford Edge and Lincoln MKX;
- the BMW X3, Z4, X5 and 3-Series programs;
- the Dodge Caliber;
- the Ford Escape;
- the Saturn VUE;
- the Freightliner P-Class;
- the Suzuki XL7;
- the Mercedes M-Class; and
- the Ford F-Series.
In 2005 the major programs for which we recorded tooling, engineering and
other sales were:
- the BMW X5;
- the Jeep Wrangler;
- the Mercedes M-Class and R-Class;
- GM's next generation full-size pickup and SUVs;
- the Ford F-Series SuperDuty;
- the Ford Fusion, Mercury Milan and Lincoln Zephyr / MKE;
- the Hummer H3; and
- the Dodge Caliber.Gross Margin
Gross margin decreased $11 million to $2.97 billion for 2006 compared to
$2.98 billion for 2005, and gross margin as a percentage of total sales
decreased to 12.3% for 2006 compared to 13.1% for 2005. In 2006, the unusual
items discussed in the "Highlights" section above negatively impacted gross
margin and gross margin as a percentage of total sales by $43 million and
0.2%, respectively. In 2005, the unusual items discussed in the "Highlights"
section above negatively impacted gross margin by $11 million. Excluding these
unusual items, the 0.6% decrease in gross margin as a percent of sales was
primarily a result of:- substantial underperformance at most of our interior systems
facilities;
- operational inefficiencies and other costs at certain facilities;
- costs associated with the cancellation of the Ford Freestar and
Mercury Monterey minivan program;
- the accrual of the minimum required payment under our EEPPP;
- lower margins as a result of a decrease in production volumes for
certain programs; and
- incremental customer price concessions.
The factors contributing to the decrease in gross margin as a percentage
of sales were partially offset by:
- a favourable revaluation to warranty accruals, substantially in
Europe;
- productivity and efficiency improvements at certain divisions;
- price reductions from our suppliers; and
- incremental gross margin earned on program launches.Depreciation and Amortization
Depreciation and amortization costs increased 11% or $79 million to
$790 million for 2006 compared to $711 million for 2005. The increase in
depreciation and amortization was primarily as a result of:- the purchase of subsidiaries, including depreciation and amortization
of assets related to the CTS acquisition in February 2006 and the
amortization of fair value increments related to the Privatizations;
- depreciation and amortization of assets at new facilities that
launched during or subsequent to 2005;
- an increase in assets employed in the business to support future
growth; and
- an increase in reported U.S. dollar depreciation and amortization due
to the strengthening of the Canadian dollar and euro, each against
the U.S. dollar.Selling, General and Administrative ("SG&A")
SG&A expenses as a percentage of sales increased to 5.6% for 2006
compared to 5.3% for 2005. SG&A expenses increased 14% or $162 million to
$1,360 million for 2006 compared to $1,198 million for 2005. Excluding the
unusual items discussed in the "Highlights" section above, SG&A expenses
increased by $114 million primarily as a result of:- increased selling, general and administrative expenses related to the
acquisition of CTS in February 2006;
- increased costs incurred at certain underperforming divisions in
Europe;
- an increase in reported U.S. dollar SG&A due to the strengthening of
the Canadian dollar and euro, each against the U.S. dollar; and
- higher infrastructure costs to support the increase in sales levels,
including spending to support program launches.
These factors were partially offset by:
- lower stock option compensation expense; and
- lower incentive compensation.Impairment Charges
Impairment charges decreased $77 million to $54 million for 2006 compared
to $131 million for 2005. For a complete discussion of the impairment charges,
see the "Highlights" section above and note 2 of the accompanying unaudited
consolidated financial statements for the three months and year ended
December 31, 2006.
Earnings before Interest and Taxes ("EBIT")(1)2006 2005 Change
-------------------------------------------------------------------------
North America $ 575 $ 733 - 22%
Europe 126 82 + 54%
Rest of World - 2 - 100%
Corporate and Other 77 131 - 41%
-------------------------------------------------------------------------
Total EBIT $ 778 $ 948 - 18%
-------------------------------------------------------------------------
-------------------------------------------------------------------------Included in EBIT for the years ended December 31, 2006 and 2005 were the
following unusual items, which have been discussed in the "Highlights" section
above.2006 2005
-------------------------------------------------------------------------
North America
Impairment charges $ (13) $ (21)
Restructuring charges (34) (21)
Sale of facilities (5) 16
-------------------------------------------------------------------------
(52) (26)
Europe
Impairment charges (41) (110)
Restructuring charges (43) (33)
Sale of facility (12) -
Charges associated with MG Rover - (15)
-------------------------------------------------------------------------
(96) (158)
Corporate and other
Restructuring charges - (5)
Settlement gain - 26
Foreign currency gain - 18
-------------------------------------------------------------------------
- 39
-------------------------------------------------------------------------
$ (148) $ (145)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBIT is defined as operating income as presented on our unaudited
consolidated financial statements before net interest expense.North America
EBIT in North America decreased 22% or $158 million to $575 million for
2006 compared to $733 million for 2005. Excluding the North American unusual
items discussed in the "Highlights" section above, the remaining $132 million
decrease in EBIT is primarily due to:- substantial underperformance at most of our interior systems
facilities;
- costs associated with the cancellation of the Ford Freestar and
Mercury Monterey minivan program;
- an accrual of the minimum required payment under our EEPPP;
- operational inefficiencies and other costs at certain facilities;
- lower margins as a result of a decrease in production volumes for
several of our programs;
- amortization of fair value increments related to the Privatizations;
and
- incremental customer price concessions.
The factors contributing to the decrease in EBIT were partially offset by:
- margins earned on new programs that launched during 2005 or 2006;
- margins earned on increased production and/or content on certain
programs;
- operational improvements at certain underperforming divisions;
- the closure or sale during or subsequent to 2005 of facilities that
incurred losses during 2005; and
- lower affiliation fees paid to Corporate.Europe
EBIT in Europe increased 54% or $44 million to $126 million for 2006
compared to $82 million for 2005. Excluding the European unusual items
discussed in the "Highlights" section above, the remaining $18 million
decrease in EBIT is primarily due to:- substantial underperformance at most of our interior systems
facilities;
- operational inefficiencies and other costs at certain facilities;
- lower margins as a result of the decrease in sales on certain
programs;
- amortization of fair value increments related to the Privatizations;
and
- incremental customer price concessions.
The factors contributing to the decrease in EBIT were partially offset by:
- a decrease in estimated product warranty costs, including a
favourable revaluation to warranty accruals as a result of updated
warranty claim data received in the third quarter of 2006;
- margins earned on assembly and production programs that launched
during or subsequent to 2005;
- lower affiliation fees paid to Corporate;
- operational improvements at certain underperforming divisions;
- productivity and efficiency improvements at certain divisions;
- lower employee profit sharing as a result of the decrease in our
consolidated earnings; and
- the acquisition of CTS in February 2006.Rest of World
In 2006 no EBIT was generated in the Rest of World compared to $2 million
for 2005. The decrease in EBIT is primarily the result of:- costs incurred at new facilities, primarily in China, as we continue
to pursue opportunities in this growing market;
- lower profits earned at our closures systems facility in Brazil; and
- amortization of fair value increments related to the Privatizations.Partially offsetting these costs was the additional margin earned on the
increased production sales discussed above.
Corporate and Other
Corporate and other EBIT decreased 41% or $54 million to $77 million for
2006 compared to $131 million for 2005. Excluding the Corporate and Other
unusual items discussed in the "Highlights" section above, EBIT decreased
$15 million as a result of:- decreased affiliation fees earned from our operating divisions;
- increased salaries and wages;
- increased compliance costs associated with section 404 of the
Sarbanes-Oxley Act; and
- increased depreciation as a result of the acquisitions of the golf
courses.
The factors contributing to the decrease in EBIT were partially offset by:
- decreased executive incentive compensation as a result of the
decrease in our consolidated earnings;
- an increase in equity income earned; and
- a decrease in stock compensation expense.Interest Expense
During 2006, we earned net interest income of $14 million, compared to
net interest expense of $6 million for 2005. The $20 million positive variance
is primarily as a result of:- a reduction in interest expense due to:
- the repayment in January 2006 of the second series of our senior
unsecured notes related to the acquisition of New Venture Gear
("NVG");
- the repayment of $59 million and $48 million of senior unsecured
notes in May 2006 and October 2006, respectively; and
- the repayments of long-term debt during 2005, including the Decoma
bank facility and certain government debt; and
- an increase in interest income earned.Operating Income
Operating income decreased 16% or $150 million to $792 million for 2006
compared to $942 million for 2005. Excluding unusual items (discussed in the
"Highlights" section above), operating income for 2006 decreased 14% or
$147 million. The decrease in operating income (excluding unusual items) was
the result of the decrease in EBIT (excluding unusual items) combined with the
positive variance in net interest (income) expense, both as described above.
Income Taxes
Our effective income tax rate on operating income (excluding equity
income) increased to 33.9% for 2006 from 31.3% for 2005. In 2006 and 2005,
income tax rates were impacted by the unusual items discussed in the
"Highlights" section above. Excluding the unusual items, our effective income
tax rate increased to 31.9% for 2006 compared to 29.7% in 2005. The increase
in the effective income tax rate is primarily the result of:- an unfavourable Supreme Court of Canada ruling against a Canadian
taxpayer which resulted in restricted deductibility of certain of our
historical foreign exchange losses; and
- an increase in losses not benefited, primarily at certain interiors
facilities in Europe.The factors contributing to the increase in the effective income tax rate
were partially offset by a change in mix of earnings, whereby proportionately
more income was earned in jurisdictions with lower income tax rates.
Minority Interest
Minority interest expense decreased $11 million because no minority
interest expense was recorded in 2006 as a result of the Privatizations.
Net Income
Net income decreased by 17% or $111 million to $528 million for 2006
compared to $639 million for 2005. Excluding the unusual items (described in
the "Highlights" section above), net income decreased $110 million as a result
of a reduction in operating income partially offset by decreases in income
taxes and minority interest expense, all as discussed above.
Earnings per Share2006 2005 Change
-------------------------------------------------------------------------
Earnings per Class A Subordinate
Voting or Class B Share
Basic $ 4.86 $ 5.99 - 19%
Diluted $ 4.78 $ 5.90 - 19%
-------------------------------------------------------------------------
Average number of Class A
Subordinate Voting and
Class B Shares outstanding
Basic 108.8 106.7 + 2%
Diluted 111.4 109.0 + 2%
-------------------------------------------------------------------------Diluted earnings per share decreased 19% or $1.12 to $4.78 for 2006
compared to $5.90 for 2005. Excluding the unusual items (described in the
"Highlights" section above), diluted earnings per share decreased $1.13 from
2005 as a result of the decrease in net income (excluding unusual items)
combined with an increase in the weighted average number of diluted shares
outstanding during the year.
The increase in the weighted average number of diluted shares outstanding
was primarily the result of the additional Class A Subordinate Voting Shares
that were included in the weighted average number of shares outstanding as a
result of the Privatizations in 2005.
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 2006 was 11.9%, a decrease from 15.4% for 2005. The unusual
items discussed in the "Highlights" section above negatively impacted 2006
ROFE by 2.1% and 2005 ROFE by 2.2%.
Excluding these unusual items, the 3.6% decrease in ROFE can be
attributed to a decrease in EBIT (excluding unusual items), as described
above, combined with an approximate $337 million increase in average funds
employed for 2006 compared to 2005. The increase in our average funds employed
was primarily as a result of:- acquisitions completed during or subsequent to 2005 including:
- the Privatizations, which incrementally added approximately
$115 million of average funds employed; and
- CTS in February 2006, which added approximately $225 million of
funds employed; and
- increased funds employed for new facilities associated with recent or
upcoming launches.
The factors contributing to the increase in our average funds employed
were partially offset by:
- the closure of certain underperforming facilities during or
subsequent to 2005; and
- a reduction of working capital at certain facilities.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
-------------------------------------------------------------------------
Cash Flow from Operations
2006 2005 Change
-------------------------------------------------------------------------
Net income $ 528 $ 639
Items not involving current
cash flows 911 901
-------------------------------------------------------------------------
1,439 1,540 $ (101)
Changes in non cash operating
assets and liabilities 157 158
-------------------------------------------------------------------------
Cash provided from operating
activities $ 1,596 $ 1,698 $ (102)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) ROFE is defined as EBIT divided by the average Funds Employed for the
period. Funds Employed is defined as long-term assets, excluding
future tax assets plus non cash operating assets and liabilities. Non
cash operating assets and liabilities are defined as the sum of
accounts receivable, inventory, income taxes recoverable and prepaid
assets less the sum of accounts payable, accrued salaries and wages,
other accrued liabilities, income taxes payable and deferred
revenues.Cash flow from operations before changes in non-cash operating assets and
liabilities decreased $101 million to $1.4 billion for 2006 compared to
$1.5 billion for 2005. The decrease in cash flow from operations was due to
the $111 million decrease in net income (as discussed above) partially offset
by a $10 million increase in items not involving current cash flows.
The increase in items not involving current cash flows was due to:- a $79 million increase in depreciation and amortization; and
- a $101 million increase in other non-cash charges, including:
- a $17 million loss on the disposal of facilities during 2006
compared to a $16 million gain on the disposal of a facility
during 2005;
- an $18 million foreign currency gain on the repatriation of funds
from Europe during 2005; and
- a $29 million increase in the loss incurred on the write-off
and/or disposal of assets, related primarily to restructuring
activities.
These increases were partially offset by:
- a $77 million decrease in impairment charges;
- a $10 million future income tax recovery as a result of a reduction
in future income tax rates in Canada;
- a $70 million increase in future income tax income as a result of
changes in temporary differences between tax values and accounting
values, including:
- an increase in net tax losses benefited;
- a decrease in liabilities not deductible for tax purposes; and
- an increase in book amortization in excess of tax amortization;
- an $11 million decrease in minority interest expense as a result of
the Privatizations; and
- a $5 million increase in equity income.Cash provided from non cash operating assets and liabilities amounted to
$157 million for 2006 compared to $158 million for 2005. The change in non-
cash operating assets and liabilities is comprised of the following sources
(and uses) of cash:2006 2005
-------------------------------------------------------------------------
Accounts receivable $ 14 $ (280)
Inventory 60 (83)
Prepaid expenses and other 15 11
Accounts payable and other accrued liabilities 62 510
Income taxes payable 35 (20)
Deferred revenues (29) 20
-------------------------------------------------------------------------
Changes in non-cash operating assets and
liabilities $ 157 $ 158
-------------------------------------------------------------------------
-------------------------------------------------------------------------During 2006, the changes in non-cash operating assets and liabilities
were not significant. During 2005, the increases in accounts receivable and
inventory were primarily the result of investments in tooling for programs
that launched in the fourth quarter of 2005 or early 2006. The increase in
accounts payable and other accrued liabilities was primarily related to the
increase in tooling receivables and tooling inventory.Capital and Investment Spending
2006 2005 Change
-------------------------------------------------------------------------
Fixed assets $ (793) $ (848)
Investments and other assets (99) (127)
-------------------------------------------------------------------------
Fixed assets, investments and other
assets additions (892) (975)
Purchases of subsidiaries (284) (187)
Proceeds from disposals 65 111
-------------------------------------------------------------------------
Cash used in investing activities $ (1,111) $ (1,051) $ (60)
-------------------------------------------------------------------------
-------------------------------------------------------------------------Fixed assets, investments and other assets additions
In 2006 we invested $793 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 2006
was for manufacturing equipment for programs that launched during 2006, or
will be launching subsequent to 2006, including equipment for the following
major programs:- GM's next generation full-size pickups and SUVs;
- the MINI Cooper;
- the Ford Edge and Lincoln MKX;
- the BMW X3, Z4, X5 and 3-Series programs; and
- the Dodge Caliber.In 2005 we invested $848 million in fixed assets, including capital for
the following major programs:- the new Ford Explorer and F-Series SuperDuty pickup trucks;
- GM's next generation full-size pickups and SUVs;
- the Peugeot 207;
- the Chrysler 300; and
- the Jeep Grand Cherokee.In 2006, we invested $99 million in investments and other assets related
primarily to:- the acquisition of a 41% equity interest in
Shin Young Metal Ind. Co., a Korean-based supplier of major
stampings, welded assemblies and tooling to the automotive industry;
- fully reimbursable planning and engineering costs relating to
programs that launched during 2006, or will be launching during 2007;
and
- long-term tooling receivables.In 2005, we invested $127 million in other assets in 2005 primarily
representing:- fully reimbursable planning and engineering costs relating to
programs that launched during 2005 or 2006; and
- long-term tooling receivables.Purchase of subsidiaries
During 2006, we invested $284 million on the purchase of subsidiaries,
including:- the acquisition of CTS in February for total consideration of
$271 million, consisting of $203 million paid in cash and $68 million
of assumed debt;
- $46 million in August to acquire the Magna Golf Course located in
Aurora, Ontario from Magna Entertainment Corp. ("MEC"); and
- the November acquisition of the Fontana Golf and Sports Club located
in Austria from MEC for total consideration of $38 million,
consisting of $17 million paid in cash and $21 million of assumed
debt.During 2005, we invested $187 million in the purchase of subsidiaries,
substantially related to the $184 million cash portion of the Privatizations.
We also completed a number of small acquisitions during 2006 and 2005,
including a number of manufacturing facilities and engineering centres. The
cash portion of these acquisitions amounted to $18 million for 2006 and
$21 million for 2005. Also during 2005, we received an $18 million cash
adjustment with respect to the NVG acquisition.
Proceeds from disposition
For 2006, proceeds from disposal were $65 million, which included:- proceeds received from the sale of a long-term tooling receivable by
a facility in the United Kingdom; and
- proceeds from normal course fixed and other asset disposals.
For 2005, proceeds from disposal were $111 million, which included:
- the cash proceeds received from the sale of a non-core seat component
facility;
- a cash payment received in respect of fully reimbursable planning and
engineering costs capitalized in prior periods; and
- proceeds from normal course fixed and other asset disposals.
Financing
2006 2005 Change
-------------------------------------------------------------------------
Repayments of debt $ (275) $ (329)
Issues of debt 24 49
Issues of Class A Subordinate
Voting Shares 28 20
Issues of shares by subsidiaries - 1
Dividends paid to minority interests - (1)
Cash dividends paid (163) (166)
-------------------------------------------------------------------------
Cash used in financing activities $ (386) $ (426) $ 40
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The repayments of debt in 2006 included the repayments:
- in January of the second series of senior unsecured zero-coupon notes
issued in connection with the NVG acquisition; and
- in May and October of senior unsecured notes of $59 million and
$48 million, respectively.
The repayments of debt in 2005 included the repayments:
- in January of the first series of senior unsecured zero-coupon notes
issued in connection with the NVG acquisition; and
- in March of the outstanding borrowing of Cdn$197 million under the
former Decoma term credit facility.The issues of debt in 2006 and 2005 consisted primarily of borrowings to
support investments in capital, including government debt and capital leases.
During 2006, we issued $28 million in Class A Subordinate Voting Shares
on the exercise of stock options, compared to $20 million during 2005.
Cash dividends paid per Class A Subordinate Voting or Class B Share were
$1.52 in both 2006 and 2005. Total cash dividends paid decreased to
$163 million for 2006 compared to $166 million for 2005 primarily as a result
of the strengthening of the Canadian dollar against the U.S. dollar.Financing Resources
2006 2005 Change
-------------------------------------------------------------------------
Liabilities
Bank indebtedness $ 63 $ 89
Long term debt due within one year 98 131
Long-term debt 605 700
-------------------------------------------------------------------------
766 920 $ (154)
Shareholders' equity 7,157 6,565 592
-------------------------------------------------------------------------
Total capitalization $ 7,923 $ 7,485 $ 438
-------------------------------------------------------------------------
-------------------------------------------------------------------------Total capitalization increased by 6% or $438 million to $7.9 billion at
December 31, 2006 as compared to $7.5 billion at December 31, 2005. The
increase in capitalization is a result of a $592 million increase in
shareholders' equity, offset in part by a $154 million decrease in
liabilities.
The increase in shareholders' equity is primarily the result of:- net income earned during 2006 (as discussed above);
- a $193 million increase in the currency translation adjustment,
primarily due to the strengthening of the Canadian dollar against the
U.S. dollar between December 31, 2005 and December 31, 2006; and
- Class A Subordinate Voting Shares issued on the exercise of stock
options.
The increases in equity were partially offset by:
- dividends paid during 2006; and
- a $6 million reduction of share capital related to the repurchase of
Class A Subordinate Voting Shares which were awarded on a restricted
basis to an executive.
The decrease in liabilities is primarily the result of:
- the repayment in January of the second series of senior unsecured
notes related to the NVG acquisition;
- repayments of $59 million and $48 million of senior unsecured notes
in May and October, respectively; and
- the deconsolidation of a partially owned European subsidiary which
declared bankruptcy in August and was subsequently sold by the
administrator.These decreases were partially offset by an increase in reported U.S.
dollar amounts, primarily as a result of the strengthening of the euro against
the U.S. dollar.
During 2006, our cash resources increased by $203 million to $1.9 billion
as a result of the cash provided from operating activities, partially offset
by the cash used in investing and financing activities as discussed above. In
addition to our cash resources, we had term and operating lines of credit
totalling $2 billion, of which $1.8 billion was unused and available.
Maximum Number of Shares Issuable
The following table presents the maximum number of shares that would be
outstanding if all of the outstanding stock options and Subordinated
Debentures issued and outstanding at February 23, 2007 were exercised or
converted:Class A Subordinate Voting and Class B Shares 109,944,722
Subordinated Debentures(i) 1,096,589
Stock options(ii) 4,015,541
-------------------------------------------------------------------------
115,056,852
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) The above amounts include shares issuable if the holders of the 6.5%
Convertible Subordinated Debentures exercise their conversion option
but exclude Class A Subordinate Voting Shares issuable, only at our
option, to settle interest and principal related to the 6.5%
Convertible Subordinated Debentures 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
At December 31, 2006, we had contractual obligations requiring annual
payments as follows:
2008- 2010- There-
2007 2009 2011 after Total
-------------------------------------------------------------------------
Operating leases with:
MI Developments Inc.
("MID") $ 145 $ 288 $ 281 $ 415 $ 1,129
Third parties 126 193 136 182 637
Long-term debt 98 462 107 36 703
-------------------------------------------------------------------------
Total contractual
obligations $ 369 $ 943 $ 524 $ 633 $ 2,469
-------------------------------------------------------------------------
-------------------------------------------------------------------------We had no unconditional purchase obligations other than those related to
inventory, services, tooling and fixed assets in the ordinary course of
business
Our unfunded obligations with respect to employee future benefit plans,
which have been actuarially determined, were $335 million at December 31,
2006. These obligations are as follows:Termination
and
Pension Retirement Long Service
Liability Liability Arrangements Total
-------------------------------------------------------------------------
Projected benefit
obligation $ 282 $ 104 $ 181 $ 567
Less plan assets (232) - - (232)
-------------------------------------------------------------------------
Unfunded amount 50 104 181 335
Unrecognized past
service costs and
actuarial losses (15) (35) (24) (74)
-------------------------------------------------------------------------
Amount recognized in
other long term
liabilities $ 35 $ 69 $ 157 $ 261
-------------------------------------------------------------------------
-------------------------------------------------------------------------Our off balance sheet financing arrangements are limited to operating
lease contracts.
The majority of our facilities are subject to operating leases with MID
or with third parties. Operating lease payments in 2006 for facilities leased
from MID and third parties were $153 million and $79 million, respectively.
Operating lease commitments in 2007 for facilities leased from MID and third
parties are expected to be $145 million and $76 million, respectively. Our
existing leases with MID generally provide for periodic rent escalations based
either on fixed-rate step increases, or on the basis of a consumer price index
adjustment (subject to certain caps).
We also have operating lease commitments for equipment. These leases are
generally of shorter duration. Operating lease payments for equipment were
$54 million for 2006, and are expected to be $50 million in 2007.
Although our consolidated contractual annual lease commitments decline
year by year, we expect that existing leases will either be renewed or
replaced. As such, lease commitments are expected to remain at current levels.
Alternatively, we will incur capital expenditures to acquire equivalent
capacity.
Long term receivables in other assets are reflected net of outstanding
borrowings from a customer's finance subsidiary of $52 million since we have a
legal right of set off of the customer's long term receivable payable to us
against such borrowings, and we intend to settle the related amounts
simultaneously.
Foreign Currency Activities
Our North American operations negotiate sales contracts with OEMs for
payment in both U.S. and Canadian dollars. Materials and equipment are
purchased in various currencies depending upon competitive factors, including
relative currency values. The North American operations use labour and
materials which are paid for in both U.S. and Canadian dollars. Our Mexican
operations generally use the U.S. dollar as the functional currency.
Our European operations negotiate sales contracts with OEMs for payment
principally in euros and British pounds. The European operations' material,
equipment and labour are paid for principally in euros and British pounds.
We employ hedging programs, primarily through the use of foreign exchange
forward contracts, in an effort to manage our foreign exchange exposure, which
arises when manufacturing facilities have committed to the delivery of
products for which the selling price has been quoted in foreign currencies.
These commitments represent our contractual obligations to deliver products
over the duration of the product programs, which can last for a number of
years. The amount and timing of the forward contracts will be dependent upon a
number of factors, including anticipated production delivery schedules and
anticipated production costs, which may be paid in the foreign currency.
Despite these measures, significant long term fluctuations in relative
currency values, in particular a significant change in the relative values of
the U.S. dollar, Canadian dollar, euro or British pound, could have an adverse
effect on our profitability and financial condition (as discussed throughout
this MD&A).
RELATED PARTIES
-------------------------------------------------------------------------
Mr. Stronach, our Chairman of the Board, and three members of his family
are trustees of the Stronach Trust. The Stronach Trust controls us through the
right to direct the votes attaching to 66% of our Class B Shares and also
controls MID and therefore MEC, through the right to direct the votes
attaching to 66% of MID's Class B Shares. Various land and buildings used in
our operations are leased from MID under operating lease agreements, which are
effected on normal commercial terms. Lease expense included in the
consolidated statements of income with respect to MID for the years ended
December 31, 2006 and 2005 was $153 million and $144 million, respectively.
Included in accounts payable are trade amounts owing to MID and its
subsidiaries in the amount of $2 million.
On March 31, 2006, we purchased a real estate property located in the
United States from MEC for a total purchase price of $6 million.
Prior to the our acquisitions of the Aurora Golf Club and Fontana Golf
and Sports Club from MEC, we had agreements with MEC for the use of the golf
course and clubhouse meeting, dining and other facilities for annual payments
of Cdn $5.0 million and (euro)2.5 million, respectively. The expense included
in the consolidated statements of income with respect to these agreements for
the years ended December 31, 2006 and 2005 was $6 million and $7 million,
respectively.
We have agreements with affiliates of the Chairman of the Board for the
provision of business development and consulting services. In addition, we
have an agreement with the Chairman of the Board for the provision of business
development and other services. The aggregate amount expensed under these
agreements with respect to the years ended December 31, 2006 and 2005 was
$27 million and $33 million, respectively.
During the year ended December 31, 2006, trusts, which exist to make
orderly purchases of our shares for employees either for transfer to the EEPPP
or to recipients of either bonuses or rights to purchase such shares from the
trusts, borrowed up to $77 million from us to facilitate the purchase of Class
A Subordinate Voting Shares. At December 31, 2006, the trusts' indebtedness to
us was $35 million.
SUBSEQUENT EVENTS
-------------------------------------------------------------------------
On January 15, 2007, we acquired two facilities from Pressac Investments
Limited for $55 million ( (euro) 43 million). The facilities in Germany and
Italy manufacture electronic components for sale to various customers,
including Volkswagen, DaimlerChrysler and Fiat.RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED DECEMBER 31, 2006
-------------------------------------------------------------------------
Sales
For the three months
ended December 31,
--------------------------------
2006 2005 Change
-------------------------------------------------------------------------
Vehicle Production Volumes
(millions of units)
North America 3.608 3.910 - 8%
Europe 3.970 4.065 - 2%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 800 $ 762 + 5%
Europe $ 378 $ 306 + 24%
-------------------------------------------------------------------------
Sales
External Production
North America $ 2,887 $ 2,980 - 3%
Europe 1,499 1,242 + 21%
Rest of World 79 48 + 65%
Complete Vehicle Assembly 1,246 1,051 + 19%
Tooling, Engineering and Other 657 533 + 23%
-------------------------------------------------------------------------
Total Sales $ 6,368 $ 5,854 + 9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------Total sales increased 9% or $514 million to $6.4 billion for the fourth
quarter of 2006 compared to $5.9 billion for the fourth quarter of 2005.
External Production Sales - North America
External production sales in North America decreased 3% or $93 million to
$2.9 billion for the fourth quarter of 2006 compared to $3.0 billion for the
fourth quarter of 2005. This decrease in production sales reflects an 8%
decrease in North American vehicle production volumes partially offset by a 5%
increase in our North American average dollar content per vehicle. More
importantly, production volumes at certain of our largest North American
customers continue to deteriorate. While North American vehicle production
volumes declined 8% during the fourth quarter of 2006 compared to the fourth
quarter of 2005, production volumes at GM and Ford declined 13% and 23%,
respectively.
Our average dollar content per vehicle grew by 5% or $38 to $800 for the
fourth quarter of 2006 compared to $762 for the fourth quarter of 2005,
primarily due to:- the launch of new programs during or subsequent to the fourth quarter
of 2005, including:
- GM's next generation full-size pick-ups and SUVs;
- the Dodge Nitro;
- the Jeep Wrangler
- the Dodge Caliber;
- the Ford Edge and Lincoln MKX;
- the Chrysler Sebring and Dodge Avenger;
- the Chrysler Aspen; and
- the Mercedes GL-Class;
- increased production and/or content on certain programs, including:
- the Ford Fusion, Mercury Milan and Lincoln Zephyr / MKZ; and
- the BMW Z4;
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar; and
- the acquisition of CTS in February 2006.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Ford Freestar and Mercury Monterey;
- the Ford Explorer and Mercury Mountaineer;
- the Ford F-Series;
- the Dodge Caravan, Grand Caravan and Chrysler Town & Country;
- the Chevrolet Envoy, Buick Rainier and GMC Trailblazer;
- the Chrysler 300 and 300C, and Dodge Charger;
- the Cadillac STS; and
- the Cadillac CTS;
- programs that ended production during or subsequent to the fourth
quarter of 2005; and
- incremental customer price concessions.External Production Sales - Europe
External production sales in Europe increased 21% or $257 million to
$1.50 billion for the fourth quarter of 2006 compared to $1.24 billion for the
fourth quarter of 2005. This increase in production sales reflects a 24%
increase in our European average dollar content per vehicle partially offset
by a 2% decline in European vehicle production volumes.
Our average dollar content per vehicle grew by 24% or $72 to $378 for the
fourth quarter of 2006 compared to $306 for the fourth quarter of 2005,
primarily due to:- an increase in reported U.S. dollar sales as a result of the
strengthening of the euro and British pound, each against the U.S.
dollar;
- the launch of new programs during or subsequent to the fourth quarter
of 2005, including:
- the MINI Cooper
- the Honda Civic;
- the BMW 3-Series;
- the Peugeot 207; and
- the Land Rover Freelander 2;
- acquisitions completed during or subsequent to the fourth quarter of
2005, including the acquisition of CTS in February 2006; and
- increased production and/or content on certain programs, including:
- the BMW X3;
- the Jaguar S-Type; and
- the Jaguar XJ-Series.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Chrysler Voyager and Grand Voyager;
- the smart City Coupe;
- the Mercedes A-Class;
- the Nissan Micra; and
- the Volvo V70; and
- incremental customer price concessions; and
- the sale of certain underperforming divisions during 2006.External Production Sales - Rest of World
External production sales in the Rest of World increased 65% or $31
million to $79 million for the fourth quarter of 2006 compared to $48 million
for the fourth quarter of 2005. The increase in production sales is a result
of:- increased production sales at existing facilities in China;
- increased production sales at our powertrain facilities in Korea;
- an increase in reported U.S. dollar production sales as a result of
the strengthening of the Korean Won against the U.S. dollar;
- an increase in production sales at a closure systems facility in
Brazil;
- the acquisition of a mirrors facility in South Africa; and
- the ramp-up of production at new facilities in China.
Complete Vehicle Assembly Sales
For the three months
ended December 31,
--------------------------------
2006 2005 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales $ 1,246 1,051 + 19%
-------------------------------------------------------------------------
Complete Vehicle Assembly Volumes
(Units)
Full-Costed: 43,187 39,610 + 9%
BMW X3, Mercedes E-Class and
G-Class, and Saab 9(3)
Convertible
Value-Added: 21,919 25,574 - 14%
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep
Commander
-------------------------------------------------------------------------
65,106 65,184 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------Complete vehicle assembly sales increased 19% or $195 million to
$1.25 billion for the fourth quarter of 2006 compared to $1.05 billion for the
fourth quarter of 2005, while complete vehicle assembly volumes were
essentially unchanged. The increase in complete vehicle assembly sales is
primarily the result of:- an increase in reported U.S. dollar sales due to the strengthening
of the euro against the U.S. dollar;
- higher assembly volumes for the BMW X3;
- the launch of the Jeep Commander in the first quarter of 2006; and
- higher assembly volumes for the Chrysler 300.
These increases were partially offset by a decrease in assembly volumes
for:
- the Jeep Grand Cherokee;
- the Mercedes E-Class 4MATIC; and
- the Chrysler Voyager.Tooling, Engineering and Other
Tooling, engineering and other sales increased 23% or $124 million to
$657 million for the fourth quarter of 2006 compared to $533 million for the
fourth quarter of 2005.
In the fourth quarter of 2006 the major programs for which we recorded
tooling, engineering and other sales were:- GM's next generation full-size pickups and SUVs;
- the MINI Cooper;
- the Ford Edge and Lincoln MKX;
- the Saturn VUE;
- a new Chrysler CUV program;
- the Dodge Caliber; and
- the Mercedes C-Class.In association with the end of production of the E-Class 4MATIC complete
vehicle assembly program, we recorded engineering sales related to the final
payment received from DaimlerChrysler for pre-production engineering research
and development costs which were previously being amortized on a units of
production basis over the assembly contract.
In the fourth quarter of 2005 the major programs for which we recorded
tooling, engineering and other sales were:- the BMW X5;
- the Jeep Wrangler; and
- GM's next generation full-size pickups and SUVs.In addition, tooling, engineering and other sales increased as a result
of the strengthening of the euro, British pound and Canadian dollar, each
against the U.S. dollar.EBIT
For the three months
ended December 31,
--------------------------------
2006 2005 Change
-------------------------------------------------------------------------
North America $ 40 $ 194
Europe (35) (93)
Rest of World 4 (3)
Corporate and Other 27 28
-------------------------------------------------------------------------
Total EBIT $ 36 $ 126 - 71%
-------------------------------------------------------------------------
-------------------------------------------------------------------------Included in EBIT for the fourth quarters of 2006 and 2005 were the
following unusual items, which are described above in the Highlights section.For the three months
ended December 31,
----------------------
2006 2005
-------------------------------------------------------------------------
North America
Impairment charges $ (13) $ (21)
Restructuring charges (7) (12)
-------------------------------------------------------------------------
(20) (33)
Europe
Impairment charges (41) $ (105)
Restructuring charges (30) (17)
-------------------------------------------------------------------------
(71) (122)
Corporate and other
Restructuring charges - (2)
-------------------------------------------------------------------------
$ (91) $ (157)
-------------------------------------------------------------------------
-------------------------------------------------------------------------North America
EBIT in North America decreased 79% or $154 million to $40 million for
the fourth quarter of 2006 compared to $194 million for the fourth quarter of
2005. Excluding the North American unusual items discussed in the "Highlights"
section above, EBIT decreased $167 million primarily due to:- substantial underperformance at most of our interior systems
facilities;
- costs associated with the cancellation of the Ford Freestar and
Mercury Monterey minivan program;
- the accrual of the minimum required payment under our EEPPP;
- operational inefficiencies and other costs at certain underperforming
facilities;
- lower margins as a result of a decrease in production volumes for
several of our programs; and
- incremental customer price concessions.
The factors contributing to the decrease in EBIT were partially offset by:
- margins earned on new programs that launched during 2005 or 2006;
- margins earned on increased production and/or content on certain
programs;
- operational improvements at certain divisions; and
- lower affiliation fees paid to Corporate.Europe
In Europe, the EBIT loss decreased 62% or $58 million to $35 million for
the fourth quarter of 2005 compared to $93 million for the fourth quarter of
2005. Excluding the European unusual items discussed in the "Highlights"
section above, EBIT increased by $7 million, primarily due to:- productivity and efficiency improvements at certain divisions;
- increased margin earned on new programs that launched during or
subsequent to the fourth quarter of 2005; and
- a reduction in employee profit sharing as a result of the decrease in
our consolidated earnings.
The factors contributing to the increase in EBIT were partially offset by:
- substantial underperformance at most of our interior systems
facilities;
- operating inefficiencies and other costs at certain underperforming
facilities;
- lower margins as a result of the decrease in sales on certain high-
content programs;
- costs incurred to develop and grow our electronics capabilities; and
- incremental customer price concessions.Rest of World
EBIT in the Rest of World increased $7 million to $4 million for the
fourth quarter of 2006 compared to a loss of $3 million for the fourth quarter
of 2005. The increase in EBIT is primarily the result of the additional margin
earned on the increased production sales as discussed above.
Partially offsetting this additional margin, were costs incurred at new
facilities, primarily in China, as we continue to pursue opportunities in this
growing market.
Corporate and Other
Corporate and other EBIT decreased 4% or $1 million to $27 million for
the fourth quarter of 2006 compared to $28 million for the fourth quarter of
2005. Excluding the Corporate and Other unusual items discussed in the
"Highlights" section above, EBIT decreased $3 million primarily as a result of
a decrease in affiliation fees received from the divisions. This decrease was
partially offset by increased equity income earned during the fourth quarter
of 2006.
CRITICAL ACCOUNTING POLICIES
-------------------------------------------------------------------------
Our discussion and analysis of our results of operations and financial
position is based upon the unaudited consolidated financial statements, which
have been prepared in accordance with Canadian GAAP. The preparation of the
unaudited consolidated financial statements requires management to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of contingent
assets and liabilities. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable in the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities. We evaluate our estimates on an
ongoing basis, however, actual results may differ from these estimates under
different assumptions or conditions.
We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our unaudited
consolidated financial statements. Management has discussed the development
and selection of the following critical accounting policies with the Audit
Committee of the Board of Directors and the Audit Committee has reviewed our
disclosure relating to critical accounting policies in this MD&A.
Revenue Recognition
(a) Separately Priced Tooling and Engineering Service Contracts
With respect to our contracts with OEMs for particular vehicle programs,
we perform multiple revenue generating activities. The most common arrangement
is where, in addition to contracting for the production and sale of parts, we
also have a separately priced contract with the OEM for related tooling costs.
Under these arrangements, we either construct the tools at our in house tool
shops or contract with third party tooling vendors to construct and supply
tooling to be used by us in the production of parts for the OEM. On completion
of the tooling build, and upon acceptance of the tooling by the OEM, we sell
the separately priced tooling to the OEM pursuant to a separate tooling
purchase order.
Such multiple element arrangements also include providing separately
priced engineering services in addition to tooling and subsequent assembly or
production activities. On completion, and upon acceptance by the OEM, we
generally sell the separately priced engineering services to the OEM prior to
the commencement of subsequent assembly or production activities.
During 2004, we adopted CICA Emerging Issues Committee Abstract No. 142,
"Revenue Arrangements with Multiple Deliverables" ("EIC-142") prospectively
for new revenue arrangements with multiple deliverables entered into by us on
or after January 1, 2004. Under EIC-142, separately priced tooling and
engineering services are accounted for as a separate revenue element only in
circumstances where the tooling and engineering has value to the customer on a
standalone basis and there is objective and reliable evidence of the fair
value of the subsequent parts production or vehicle assembly. Based on the
typical terms and process for the negotiation of separately priced tooling
contracts, we anticipate that substantially all such tooling contracts will
continue to be accounted for as separate revenue elements. Because of the
unique contracts related to multiple element arrangements involving
engineering and subsequent assembly or production activities, all significant
arrangements will be evaluated in order to determine whether the engineering
component of the arrangement qualifies as a separate revenue element. If the
engineering component is not considered to be a separate revenue element,
revenues and costs of sales on such activities would be deferred and amortized
on a gross basis over the subsequent assembly or production program.
Revenues from engineering services and tooling contracts that qualify as
separate revenue elements are generally recognized on a percentage of
completion basis. The percentage of completion method recognizes revenue and
cost of sales over the term of the contract based on estimates of the state of
completion, total contract revenue and total contract costs. Under such
contracts, the related receivables could be paid in full upon completion of
the contract, in installments or in fixed amounts per vehicle based on
forecasted production volumes. In the event that actual production volumes are
less than those forecasted, a reimbursement for any shortfall will be made
annually.
Tooling and engineering contract prices are generally fixed, however,
price changes, change orders and program cancellations may affect the ultimate
amount of revenue recorded with respect to a contract. Contract costs are
estimated at the time of signing the contract and are reviewed at each
reporting date. Adjustments to the original estimates of total contract costs
are often required as work progresses under the contract and as experience is
gained, even though the scope of the work under the contract may not change.
When the current estimates of total contract revenue and total contract costs
indicate a loss, a provision for the entire loss on the contract is made.
Factors that are considered in arriving at the forecasted loss on a contract
include, amongst others, cost over-runs, non-reimbursable costs, change orders
and potential price changes.
For U.S. GAAP purposes, we adopted EITF 00-21, "Accounting for Revenue
Arrangements With Multiple Deliverables" prospectively for new revenue
arrangements with multiple deliverables entered into by us on or after
January 1, 2004, which harmonized our Canadian and U.S. GAAP reporting for
such arrangements. For separately priced in-house tooling and engineering
services contracts provided in conjunction with subsequent production or
assembly services entered into prior to January 1, 2004, the revenues and
costs of sales on such activities continue to be deferred and amortized on a
gross basis over the remaining life of the production or assembly program for
U.S. GAAP purposes.
(b) Contracts With Purchased Components
Revenues and cost of sales from separately priced tooling and engineering
services contracts are presented on a gross basis in the consolidated
statements of income when we are acting as principal and are subject to
significant risks and rewards of the business. Otherwise, components of
revenue and related costs are presented on a net basis. To date, substantially
all separately priced engineering services and tooling contracts have been
recorded on a gross basis.
As reported above, the reporting of sales and cost of sales for our
vehicle assembly contracts is affected by the contractual terms of the
arrangement.
In addition to our assembly business, we also enter into production
contracts where we are required to coordinate the design, manufacture,
integration and assembly of a large number of individual parts and components
into a modular system for delivery to the OEM's vehicle assembly plant. Under
these contracts, we manufacture a portion of the products included in the
module but also purchase components from various sub-suppliers and assemble
such components into the completed module. We recognize module revenues and
cost of sales on a gross basis when we have a combination of:- primary responsibility for providing the module to the OEM;
- responsibility for styling and/or product design specifications;
- latitude in establishing sub-supplier pricing;
- responsibility for validation of sub-supplier part quality;
- inventory risk on sub-supplier parts;
- exposure to warranty; and
- exposure to credit risk on the sale of the module to the OEM.To date, revenues and cost of sales on our module contracts have been
reported on a gross basis.
Amortized Engineering and Customer Owned Tooling Arrangements
We incur pre-production engineering research and development ("ER&D")
costs related to the products we produce for OEMs under long-term supply
agreements. We expense ER&D costs, which are paid for as part of the
subsequent related production and assembly program, as incurred unless a
contractual guarantee for reimbursement exists.
In addition, we expense all costs as incurred related to the design and
development of moulds, dies and other tools that we will not own and that will
be used in, and reimbursed as part of the piece price amount for, subsequent
related production or assembly program unless the supply agreement provides us
with a contractual guarantee for reimbursement of costs or the non-cancellable
right to use the moulds, dies and other tools during the supply agreement, in
which case the costs are capitalized.
ER&D and customer-owned tooling costs capitalized in "Other assets" are
amortized on a units of production basis over the related long-term supply
agreement.
Impairment of Goodwill and Other Long-lived Assets
Goodwill is subject to an annual impairment test or more frequently when
an event occurs that more likely than not reduces the fair value of a
reporting unit below its carrying value.
We evaluate fixed assets and other long lived assets for impairment
whenever indicators of impairment exist. Indicators of impairment include
prolonged operating losses or a decision to dispose of, or otherwise change
the use of, an existing fixed or other long lived asset. If the sum of the
future cash flows expected to result from the asset, undiscounted and without
interest charges, is less than the reported value of the asset, an asset
impairment must be recognized in the consolidated financial statements. The
amount of impairment to be recognized is calculated by subtracting the fair
value of the asset from the reported value of the asset.
We believe that accounting estimates related to goodwill and long lived
asset impairment assessments are "critical accounting estimates" because: (i)
they are subject to significant measurement uncertainty and are susceptible to
change as management is required to make forward-looking assumptions regarding
the impact of improvement plans on current operations, in-sourcing and other
new business opportunities, program price and cost assumptions on current and
future business, the timing of new program launches and future forecasted
production volumes; and (ii) any resulting impairment loss could have a
material impact on our consolidated net income and on the amount of assets
reported in our consolidated balance sheet.
Warranty
We record product warranty liabilities bas ed on individual customer
agreements. Under most customer agreements, we only account for existing or
probable claims on product default issues when amounts related to such issues
are probable and reasonably estimable. Under certain complete vehicle
engineering and assembly contracts, we record an estimate of future warranty-
related costs based on the terms of the specific customer agreements and the
specific customers' warranty experience.
Product liability provisions are established based on our best estimate
of the amounts necessary to settle existing claims on product default issues.
Recall costs are costs incurred when government regulators and/or our
customers decide to recall a product due to a known or suspected performance
issue, and we are required to participate either voluntarily or involuntarily.
Costs typically include the cost of the product being replaced, the customer's
cost of the recall and labour to remove and replace the defective part. When a
decision to recall a product has been made or is probable, our estimated cost
of the recall is recorded as a charge to net earnings in that period. In
making this estimate, judgment is required as to the number of units that may
be returned as a result of the recall, the total cost of the recall campaign,
the ultimate negotiated sharing of the cost between the customer and us and,
in some cases, the extent to which a supplier to us will share in the recall
cost.
Future Income Tax Assets
At December 31, 2006, we had recorded future tax assets (net of related
valuation allowances) in respect of loss carryforwards and other deductible
temporary differences of $109 million and $146 million, respectively. The
future tax assets in respect of loss carryforwards relate primarily to U.S.
operations.
On a quarterly basis, we evaluate the realizability of future tax assets
by assessing our valuation allowance and by adjusting the amount of such
allowance, if necessary. The factors used to assess the likelihood of
realization are our forecast of future taxable income and available tax
planning strategies that could be implemented to realize the future tax
assets. We have, and we continue to use tax planning strategies to realize
future tax assets in order to avoid the potential loss of benefits.
At December 31, 2006, we had gross income tax loss carryforwards of
approximately $771 million, which relate primarily to operations in the United
Kingdom, Belgium, Germany, Italy and Spain, the tax benefits of which have not
been recognized in our unaudited consolidated financial statements. Of the
total losses, $253 million expire between 2007 and 2026 and the remainder have
no expiry date. If operations improve to profitable levels in these
jurisdictions, and such improvements are sustained for a prolonged period of
time, our earnings will benefit from these loss carryforward pools except for
the benefit of losses obtained on acquisition which would reduce related
goodwill and intangible balances.
Employee Benefit Plans
The determination of the obligation and expense for defined benefit
pension, termination and long service arrangements and other post retirement
benefits, such as retiree healthcare and medical benefits, is dependent on the
selection of certain assumptions used by actuaries in calculating such
amounts. Those assumptions include, among others, the discount rate, expected
long term rate of return on plan assets and rates of increase in compensation
costs. Actual results that differ from the assumptions used are accumulated
and amortized over future periods and therefore, impact the recognized expense
and recorded obligation in future periods. Significant changes in assumptions
or significant new plan enhancements could materially affect our future
employee benefit obligations and future expense. At December 31, 2006, we had
unrecognized past service costs and actuarial experience losses of $74 million
that will be amortized to future employee benefit expense over the expected
average remaining service life of employees.
COMMITMENTS AND CONTINGENCIES
-------------------------------------------------------------------------
From time to time, we may be contingently liable for litigation and other
claims. Refer to note 21 of our 2005 audited consolidated financial
statements, which describes these claims.
SELECTED ANNUAL CONSOLIDATED FINANCIAL DATA
-------------------------------------------------------------------------
The following selected consolidated financial data has been derived from,
and should be read in conjunction with the accompanying unaudited consolidated
financial statements for the year ended December 31, 2006, which are prepared
in accordance with Canadian GAAP.2006 2005 2004
-------------------------------------------------------------------------
Income Statement Data
Vehicle Production Volumes
(millions of units)
North America 15.335 15.722 15.732
Europe 15.536 15.959 16.558
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 775 $ 731 $ 623
Europe $ 362 $ 317 $ 285
-------------------------------------------------------------------------
Sales
External Production
North America $ 11,883 $ 11,499 $ 9,798
Europe 5,624 5,058 4,724
Rest of World 269 171 139
Complete Vehicle Assembly 4,378 4,110 4,450
Tooling, Engineering and Other 2,026 1,973 1,542
-------------------------------------------------------------------------
Total Sales $ 24,180 $ 22,811 $ 20,653
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income $ 528 $ 639 $ 676
Earnings per Class A Subordinate
Voting or Class B Share
Basic $ 4.86 $ 5.99 $ 6.99
Diluted $ 4.78 $ 5.90 $ 6.95
Cash dividends paid per Class A
Subordinate Voting or
Class B Share $ 1.52 $ 1.52 $ 1.48
-------------------------------------------------------------------------
Financial Position Data
Cash and cash equivalents $ 1,885 $ 1,682 $ 1,519
Working Capital $ 2,277 $ 2,215 $ 2,183
Total assets $ 13,154 $ 12,321 $ 11,615
Financing Resources
Liabilities
Bank indebtedness $ 63 $ 89 $ 136
Long term debt due within
one year 98 131 84
Long-term debt 605 700 984
Minority interest - - 634
-------------------------------------------------------------------------
766 920 $ 1,838
Shareholders' equity 7,157 6,565 5,335
-------------------------------------------------------------------------
Total capitalization $ 7,923 $ 7,485 $ 7,173
-------------------------------------------------------------------------
-------------------------------------------------------------------------Changes from 2005 to 2006 are explained in "Results of Operations - For
the Year Ended December 31, 2006" section above.
2005 COMPARED TO 2004
SALES
Total sales increased 10% or $2.2 billion to $22.8 billion for 2005
compared to $20.7 billion for 2004.
External Production Sales - North America
External production sales in North America increased 17% or $1.7 billion
to $11.5 billion for 2005 compared to $9.8 billion for 2004. This increase in
production sales reflects a 17% increase in our North American average dollar
content per vehicle as North American vehicle production volumes for 2005
remained relatively consistent with 2004 vehicle production volumes.
Our average dollar content per vehicle grew by 17% or $108 to $731 for
2005 compared to $623 for 2004, primarily due to:- the launch of new programs during or subsequent to the year ended
December 31, 2004, including:
- the Chevrolet Cobalt and Pontiac Pursuit;
- the Hummer H3;
- the Ford Mustang;
- the Chevrolet HHR;
- the Mercedes M-Class; and
- the Pontiac Montana SV6, Saturn Relay, Buick Terazza and Chevrolet
Uplander;
- the acquisition of the North American operations of NVG in
September 2004;
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar; and
- increased production and/or content on certain programs, including:
- the Chrysler 300 and 300C; and
- the Dodge Caravan, Grand Caravan and Chrysler Town & Country.The factors contributing to the growth in our average dollar content per
vehicle were partially offset by:- the impact of lower production and/or content on certain high content
programs, including:
- the GMT800 platform;
- the Ford Freestar and Mercury Monterey;
- the Dodge Ram Pickup;
- the Mazda Tribute and Ford Escape; and
- the GMC Canyon and Chevrolet Colorado;
- programs that ended production during or subsequent to the year
ended December 31, 2004; and
- incremental customer price concessions.External Production Sales - Europe
External production sales in Europe increased 7% or $334 million to $5.1
billion for 2005 compared to $4.7 billion for 2004. This increase in
production sales reflects an 11% increase in our European average dollar
content per vehicle partially offset by a 4% decline in European vehicle
production volumes.
Our average dollar content per vehicle grew by 11% or $32 to $317 for
2005 compared to $285 for 2004, primarily as a result of:- the launch of new programs during or subsequent to the year ended
December 31, 2004, including:
- the Mercedes A-Class;
- the Mercedes B-Class;
- the Land Rover Discovery;
- the Land Rover Range Rover Sport; and
- the Volkswagen Passat;
- the acquisition of the European operations of NVG in September 2004;
and
- increased production and/or content on certain programs, including:
- the BMW 1-Series; and
- the Volkswagen Transporter and Multivan.
The factors contributing to the growth in our average dollar content per
vehicle were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Mercedes E-Class; and
- the Volkswagen Golf;
- the end of production on certain programs, including the end of
production on all MG Rover programs as a result of the MG Rover
situation; and
- incremental customer price concessions.External Production Sales - Rest of World
External production sales in the Rest of World increased 23% or
$32 million to $171 million for 2005 compared to $139 million for 2004. The
increase in production sales is primarily a result of:- the ramp-up of production at new facilities in China;
- increased production at our powertrain facilities in Korea; and
- increased production at a closure systems facility in Brazil.The factors contributing to the increase in production sales were
partially offset by the closure of an exterior systems facility in Brazil and
an engineered glass facility in Malaysia.
Complete Vehicle Assembly Sales
Although assembly volumes increased 1% or 3,261 units, complete vehicle
assembly sales decreased 8% or $340 million to $4.1 billion for 2005 compared
to $4.5 billion for 2004. The decrease in complete vehicle assembly sales is
primarily the result of lower assembly volumes for all vehicles accounted for
on a full-cost basis, partially offset by:- higher assembly volumes for the Jeep Grand Cherokee as a result of
the launch of a new model in January 2005; and
- the start of assembly in the second quarter of 2005 of the
Chrysler 300 for distribution in European markets and certain other
markets outside North America.Tooling, Engineering and Other
Tooling, engineering and other sales increased 28% or $431 million to
$2.0 billion for 2005 compared to $1.5 billion for 2004.
In 2005 the major programs for which we recorded tooling, engineering and
other sales were:- the BMW X5;
- the Jeep Wrangler;
- the Mercedes M-Class and R-Class;
- GM's next generation full-size pickup and sport utilities platform;
- the Ford F-Series SuperDuty;
- the Ford Fusion, Mercury Milan and Lincoln Zephyr;
- the Hummer H3; and
- the Dodge Caliber.
In 2004 the major programs for which we recorded tooling, engineering and
other sales were:
- the Ford Fusion and Mercury Milan;
- the Ford Explorer and Mercury Mountaineer; and
- the Mercedes M-Class and R-Class.In addition, tooling, engineering and other sales increased as a result
of the strengthening of the Canadian dollar against the U.S. dollar.
Net Income
Net income decreased by 5% or $37 million to $639 million for 2005
compared to $676 million for 2004. Included in net income are the following
items (net of minority interest and income taxes):2005 2004 Change
-------------------------------------------------------------------------
Impairment charges $ (98) $ (22)
Restructuring charges (48) (17)
Sale of facility 10 -
Charges associated with MG Rover (13) -
Settlement gain 16 -
Foreign currency gain 18 -
Pension curtailment gain - 18
Stock options - (12)
Future income tax charge (recovery)
related to tax rate changes - 6
-------------------------------------------------------------------------
$ (115) $ (27) $ (88)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The unusual items for 2005 have been discussed above in the "Highlights"
section. During 2004, the unusual items were as follows:
- asset impairments charges relating to certain exterior systems
facilities in Europe and North America;
- restructuring charges in Europe related to the reorganization and
closure of certain interiors facilities, and restructuring charges in
North America related primarily to certain program specific assets;
- a pension curtailment gain as a result of freezing certain defined
benefit pension plans;
- a one-time charge to compensation expense as a result of modifying
option agreements with certain of our former employees; and
- a future income tax recovery as a result of a reduction in future
income tax rates in Europe.Excluding the unusual items, net income increased $51 million as a result
of an increase in gross margin of $63 million and decreases in interest
expense, net, minority interest expense and income taxes of $20 million,
$60 million and $74 million, respectively. These factors were partially offset
by increases in SG&A spending and depreciation and amortization of $33 million
and $127 million, respectively, and a $6 million decrease in equity income.
Gross margin as a percentage of total sales decreased to 13.1% for 2005
compared to 14.3% for 2004. Excluding the unusual items discussed above, gross
margin as a percentage of total sales for 2005 decreased 1.1% due to:- an increase in commodity prices, combined with lower scrap steel
prices;
- a decrease in production volumes for several of our high content
programs including the GMT800 platform, and the Ford Freestar and
Mercury Monterey;
- inefficiencies at certain facilities;
- the acquisition of the NVG business, which operated at margins that
are lower than our consolidated average gross margin;
- incremental customer price concessions;
- costs incurred during 2005 at new facilities in preparation for
programs that launched during 2005 or for programs that will be
launching subsequent to the end of the year; and
- an increase in tooling and other sales that earn low or no margins.
The factors contributing to the decrease in gross margin as a percentage
of sales were partially offset by:
- productivity and efficiency improvements at certain divisions;
- price reductions from our suppliers;
- decreased complete vehicle assembly sales for certain vehicles
accounted for on a full-cost basis; and
- incremental gross margin earned on program launches.
Excluding unusual items discussed above, the increase in depreciation and
amortization costs for 2005 was primarily as a result of:
- an increase in assets employed in the business to support future
growth;
- amortization of fair value increments related to the Privatizations;
- acquisitions completed during or subsequent to 2004; and
- an increase in reported U.S. dollar depreciation and amortization due
to the strengthening of the Canadian dollar against the U.S. dollar.
SG&A expenses as a percentage of sales decreased to 5.3% for 2005 compared
to 5.7% for 2004. Excluding unusual items discussed above, SG&A increased $33
million primarily a result of:
- increased spending as a result of the acquisition of NVG;
- additional stock compensation expense as a result of the
Privatizations;
- an increase in reported U.S. dollar SG&A due to the strengthening of
the Canadian dollar against the U.S. dollar; and
- higher infrastructure costs to support the increase in sales levels,
including spending to support program launches.The decrease in minority interest expense is a result of the elimination
of minority interest for Tesma, Decoma and Intier for the periods subsequent
to the Privatizations.
Earnings per Share
Diluted earnings per share decreased 15% or $1.05 to $5.90 for 2005
compared to $6.95 for 2004. Included in the $1.05 decrease in diluted earnings
per share is the net decrease in diluted earnings per share of $0.77 related
to the unusual items discussed above.
Excluding the unusual items, diluted earnings per share decreased $0.28
from 2004 to 2005 as a result of a 12% increase in the weighted average number
of diluted shares outstanding during the year partially offset by the increase
in net income (excluding unusual items).
The increase in the weighted average number of diluted shares outstanding
was primarily as a result of the additional Class A Subordinate Voting Shares
that were included in the weighted average number of shares outstanding as a
result of the Privatizations.
Financial Position
-------------------------------------------------------------------------
Cash and cash equivalents
During 2005, our cash resources increased by $163 million to $1.7 billion
as a result of the cash provided from operating activities, partially offset
by the cash used in investing and financing activities.
Total assets
During 2005, total assets increased by $706 million to $12.3 billion as a
result of:- the Privatizations, which added approximately $500 million of total
assets;
- investments (including fixed, other long-term, and non-cash working
capital assets) in new and existing production facilities to support
our continued growth;
- the growth in our cash resources, as discussed above; and
- an increase in U.S. dollar reported amounts of our assets as a result
of the strengthening of the Canadian dollar partially offset by the
weakening of the euro and British pound, all against the U.S. dollar.Financing Resources
Total capitalization increased by 4% or $312 million to $7.5 billion for
2005 compared to $7.2 billion for 2004. The increase in capitalization is a
result of a $1.2 billion increase in shareholders' equity, offset in part by a
$918 million decrease in liabilities.
The increase in shareholders' equity is a result of:- an increase in share capital primarily as a result of the Class A
Subordinate Voting Shares issued in connection with the
Privatizations; and
- net income earned during 2005.
The increases in equity were partially offset by:
- dividends paid; and
- a decrease in the currency translation adjustment.
The decrease in liabilities is primarily a result of:
- the decrease in minority interest as a result of the Privatizations;
and
- decreases in long-term debt as a result of the repayment of:
- the first series of our senior unsecured notes related to the
acquisition of NVG; and
- the outstanding debt on Decoma's term debt facility.On October 12, 2005 we completed a new five-year revolving term facility
that expires on October 12, 2010. The facility has a North American tranche of
$1.57 billion, a European tranche of (euro)300 million and an Asian tranche of
$50 million.
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
-------------------------------------------------------------------------
The following selected consolidated financial data has been prepared in
accordance with Canadian GAAP.For the three month periods ended
------------------------------------------
Mar 31, Jun 30, Sep 30, Dec 31,
2006 2006 2006 2006
-------------------------------------------------------------------------
Sales $ 6,019 $ 6,369 $ 5,424 $ 6,368
Net income $ 212 $ 193 $ 94 $ 29
Earnings per Class A
Subordinate Voting
or Class B Share
Basic $ 1.95 $ 1.78 $ 0.87 $ 0.26
Diluted $ 1.91 $ 1.75 $ 0.86 $ 0.26
-------------------------------------------------------------------------
For the three month periods ended
------------------------------------------
Mar 31, Jun 30, Sep 30, Dec 31,
2005 2005 2005 2005
-------------------------------------------------------------------------
Sales $ 5,718 $ 5,858 $ 5,381 $ 5,854
Net income $ 172 $ 225 $ 159 $ 83
Earnings per Class A
Subordinate Voting
or Class B Share
Basic $ 1.69 $ 2.10 $ 1.47 $ 0.76
Diluted $ 1.68 $ 2.06 $ 1.44 $ 0.75
-------------------------------------------------------------------------In general, sales increased from 2005 to 2006 as a result of product
launches, the acquisition of CTS in February 2006, and the strengthening of
the Canadian dollar against the U.S. dollar. The third quarter of both years
is generally affected by the normal seasonal effects of lower vehicle
production volumes as a result of OEM summer shutdowns.
Included in the quarterly net income are the following unusual items that
have been discussed earlier in this MD&A:For the three month periods ended
------------------------------------------
Mar 31, Jun 30, Sep 30, Dec 31,
2006 2006 2006 2006
-------------------------------------------------------------------------
Impairment charges $ - $ - $ - $ (46)
Restructuring charges (9) (18) (4) (34)
Sale of facilities - (15) - -
Future tax recovery - 10 - -
-------------------------------------------------------------------------
$ (9) $ (23) $ (4) $ (80)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three month periods ended
------------------------------------------
Mar 31, Jun 30, Sep 30, Dec 31,
2005 2005 2005 2005
-------------------------------------------------------------------------
Impairment charges $ - $ (5) $ - $ (93)
Restructuring charges (4) (7) (11) (26)
Charges associated with
MG Rover (13) - - -
Foreign currency gain - 18 - -
Settlement gain - - 16 -
Sale of facility - 10 - -
-------------------------------------------------------------------------
$ (17) $ 16 $ 5 $ (119)
-------------------------------------------------------------------------
-------------------------------------------------------------------------For more information regarding our quarter over quarter results, please
refer to our first, second and third quarter 2006 quarterly reports which 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.
FORWARD LOOKING STATEMENTS
-------------------------------------------------------------------------
The previous discussion may contain statements that, to the extent that
they are not recitations of historical fact, constitute "forward-looking
statements" within the meaning of applicable securities legislation. Forward-
looking statements may include financial and other projections, as well as
statements regarding our future plans, objectives or economic performance, or
the assumptions underlying any of the foregoing. We use words such as "may",
"would", "could", "will", "likely", "expect", "anticipate", "believe",
"intend", "plan", "forecast", "project", "estimate" and similar expressions to
identify forward-looking statements. Any such forward-looking statements are
based on assumptions and analyses made by us in light of our experience and
our perception of historical trends, current conditions and expected future
developments, as well as other factors we believe are appropriate in the
circumstances. However, whether actual results and developments will conform
with our expectations and predictions is subject to a number of risks,
assumptions and uncertainties. These risks, assumptions and uncertainties
include, but are not limited to, the impact of: declining production volumes
and changes in consumer demand for vehicles; a reduction in the production
volumes of certain vehicles, such as certain light trucks; our ability to
offset increases in the cost of commodities, such as steel and resins, as well
as energy prices; fluctuations in relative currency values; our ability to
offset price concessions demanded by our customers; our 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; the termination by
our customers of any material contracts; product liability claims in excess of
our insurance coverage; expenses related to the restructuring and
rationalization of some of our operations; impairment charges; our ability to
successfully identify, complete and integrate acquisitions; risks associated
with new program launches; legal claims against us; risks of conducting
business in foreign countries; unionization activities at our facilities; work
stoppages and labour relations disputes; changes in laws and governmental
regulations; costs associated with compliance with environmental laws and
regulations; potential conflicts of interest involving our controlling
shareholder, the Stronach Trust; and other factors set out in our Annual
Information Form filed with securities commissions in Canada and our annual
report on Form 40-F filed with the United States Securities and Exchange
Commission, and subsequent filings. In evaluating forward-looking statements,
readers should specifically consider the various factors which could cause
actual events or results to differ materially from those indicated by such
forward-looking statements. Unless otherwise required by applicable securities
laws, we do not intend, nor do we undertake any obligation, to update or
revise any forward-looking statements to reflect subsequent information,
events, results or circumstances or otherwise.MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(U.S. dollars in millions, except per share figures)
Three months ended Year ended
December 31, December 31,
-------------------- --------------------
Note 2006 2005 2006 2005
-------------------------------------------------------------------------
Sales $ 6,368 $ 5,854 $ 24,180 $ 22,811
-------------------------------------------------------------------------
Cost of goods sold 5,701 5,094 21,211 19,831
Depreciation and
amortization 210 196 790 711
Selling, general and
administrative 7 370 314 1,360 1,198
Interest (income)
expense, net (6) 1 (14) 6
Equity income (3) (2) (13) (8)
Impairment charges 2 54 126 54 131
-------------------------------------------------------------------------
Income from operations
before income taxes and
minority interest 42 125 792 942
Income taxes 13 42 264 292
Minority interest - - - 11
-------------------------------------------------------------------------
Net income $ 29 $ 83 $ 528 $ 639
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per Class A
Subordinate Voting
or Class B Share:
Basic $ 0.26 $ 0.76 $ 4.86 $ 5.99
Diluted $ 0.26 $ 0.75 $ 4.78 $ 5.90
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash dividends paid per
Class A Subordinate
Voting or Class B
Share $ 0.38 $ 0.38 $ 1.52 $ 1.52
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of
Class A Subordinate
Voting and Class B
Shares outstanding
during the period
(in millions):
Basic 108.8 108.4 108.6 106.7
Diluted 110.5 111.1 111.4 109.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
(U.S. dollars in millions)
Three months ended Year ended
December 31, December 31,
-------------------- --------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Retained earnings,
beginning of period $ 3,784 $ 3,368 $ 3,409 $ 2,937
Net income 29 83 528 639
Dividends on Class A
Subordinate Voting and
Class B Shares (40) (42) (164) (167)
-------------------------------------------------------------------------
Retained earnings,
end of period $ 3,773 $ 3,409 $ 3,773 $ 3,409
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in millions)
Three months ended Year ended
December 31, December 31,
-------------------- --------------------
Note 2006 2005 2006 2005
-------------------------------------------------------------------------
Cash provided from
(used for):
OPERATING ACTIVITIES
Net income $ 29 $ 83 $ 528 $ 639
Items not involving
current cash flows 295 325 911 901
-------------------------------------------------------------------------
324 408 1,439 1,540
Changes in non cash
operating assets and
liabilities 474 750 157 158
-------------------------------------------------------------------------
798 1,158 1,596 1,698
-------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Fixed asset additions (249) (321) (793) (848)
Purchase of subsidiaries 3 (30) (19) (284) (187)
Increase in investments
and other assets (41) (27) (99) (127)
Proceeds from disposition 26 46 65 111
-------------------------------------------------------------------------
(294) (321) (1,111) (1,051)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayments of debt (249) (96) (275) (329)
Issues of debt - - 24 49
Issues of Class A
Subordinate Voting Shares 12 1 28 21
Dividends (40) (42) (163) (167)
-------------------------------------------------------------------------
(277) (137) (386) (426)
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash and cash
equivalents 9 (9) 104 (58)
-------------------------------------------------------------------------
Net increase in cash and
cash equivalents during
the period 236 691 203 163
Cash and cash equivalents,
beginning of period 1,649 991 1,682 1,519
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 1,885 $ 1,682 $ 1,885 $ 1,682
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars in millions)
December 31, December 31,
Note 2006 2005
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 1,885 $ 1,682
Accounts receivable 3,629 3,436
Inventories 1,437 1,388
Prepaid expenses and other 109 97
-------------------------------------------------------------------------
7,060 6,603
-------------------------------------------------------------------------
Investments 151 142
Fixed assets, net 4,114 4,124
Goodwill 2,3 1,096 918
Future tax assets 255 208
Other assets 478 326
-------------------------------------------------------------------------
$ 13,154 $ 12,321
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness $ 63 $ 89
Accounts payable 3,608 3,241
Accrued salaries and wages 453 474
Other accrued liabilities 4 426 394
Income taxes payable 135 59
Long term debt due within one year 98 131
-------------------------------------------------------------------------
4,783 4,388
-------------------------------------------------------------------------
Deferred revenue 73 85
Long term debt 605 700
Other long term liabilities 288 241
Future tax liabilities 248 342
-------------------------------------------------------------------------
5,997 5,756
-------------------------------------------------------------------------
Shareholders' equity
Capital stock 6
Class A Subordinate Voting Shares
(issued: 108,787,387;
December 31, 2005 - 108,184,395) 2,505 2,470
Class B Shares
(convertible into Class A Subordinate
Voting Shares)
(issued: 1,092,933;
December 31, 2005 - 1,093,983) - -
Contributed surplus 7 65 65
Retained earnings 3,773 3,409
Currency translation adjustment 814 621
-------------------------------------------------------------------------
7,157 6,565
-------------------------------------------------------------------------
$ 13,154 $ 12,321
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Magna
International Inc. and its subsidiaries (collectively "Magna" or the
"Company") have been prepared in United States dollars following
Canadian generally accepted accounting principles, as set out in the
2005 annual consolidated financial statements.
The unaudited interim consolidated financial statements do not
conform in all respects to the requirements of generally accepted
accounting principles for annual financial statements. Accordingly,
these unaudited interim consolidated financial statements should be
read in conjunction with the 2005 annual consolidated financial
statements.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring adjustments, necessary to present fairly the
financial position at December 31, 2006 and the results of operations
and cash flows for the three months and years ended December 31, 2006
and 2005.
2. GOODWILL AND LONG-LIVED ASSETS
In conjunction with the Company's annual goodwill impairment analysis
and consideration of other indicators of impairment of its long-lived
assets at certain operations, the Company has recorded impairment
charges as follows:
Three months ended Year ended
December 31, December 31,
-------------------- --------------------
2006 2005 2006 2005
---------------------------------------------------------------------
(a) Long-lived assets
impairments:
Europe $ 41 $ 84 $ 41 $ 89
North America 13 21 13 21
(b) Goodwill impairment:
Europe - 21 - 21
---------------------------------------------------------------------
$ 54 $ 126 $ 54 $ 131
---------------------------------------------------------------------
---------------------------------------------------------------------
(a) Long-lived assets impairments
Europe During 2006, the Company recorded asset impairments of
$41 million ($38 million after tax) relating to certain assets
and facilities in Germany, Austria, the United Kingdom, the
Czech Republic and Spain. Due to recurring losses that were
projected to continue as a result of existing sales levels and
limited sales growth prospects, asset impairments were recorded
as follows:
Germany (exterior systems) $ 18
Austria (powertrain systems) 11
United Kingdom (interior systems) 8
Czech Republic (seating systems) 2
Spain (interior systems) 2
---------------------------------------------------------------
$ 41
---------------------------------------------------------------
---------------------------------------------------------------
During 2005, the Company recorded asset impairments of
$89 million ($63 million after tax) relating to certain assets
and facilities including:
In the United Kingdom, Belgium and Germany, the Company
identified issues relating to certain exterior systems
facilities, including: (i) recurring losses that were projected
to continue as a result of existing sales levels and limited
sales growth prospects at certain of these facilities;
(ii) uncertain long-term production volumes for the United
Kingdom market in general; (iii) excess paint capacity in the
European market; and (iv) the resultant rationalization of
painting and moulding facilities. As a result, an asset
impairment of $80 million was recorded.
The Company also identified an impairment at a closure systems
facility in the Czech Republic. Due to recurring losses that
were projected to continue as a result of existing sales levels
and limited sales growth prospects, an asset impairment of
$8 million was recorded.
North America
During 2006, the Company identified issues relating to certain
interior systems facilities in the United States, including
projected losses throughout the Company's business planning
period as a result of existing and forecasted sales levels. As
a result, the Company recorded asset impairments of $13 million
($8 million after tax) relating to certain assets at these
facilities.
During 2005, the Company recorded an asset impairment of
$21 million ($14 million after tax) relating to certain assets
and facilities.
The Company identified issues relating to an exterior systems
facility in Canada, including losses that were projected to be
incurred throughout the Company's business planning period as a
result of existing and projected sales levels. As a result, an
asset impairment of $12 million was recorded.
The Company also identified issues relating to certain
powertrain facilities in the United States, including:
(i) ceasing operations at a facility; and (ii) recurring losses
that were projected to continue. As a result, asset impairments
of $9 million were recorded in respect of certain assets at
these facilities.
(b) Goodwill impairment
In conjunction with its annual business planning cycle, the
Company completed its goodwill impairment analysis. As a result
of this analysis, during 2005 the Company recorded a
$21 million goodwill impairment charge related to its exterior
systems reporting unit in Europe. This impairment charge was
not tax benefited. No goodwill impairment charge was recorded
during 2006.
3. ACQUISITIONS
(a) For the year ended December 31, 2006
(i) CTS Fahrzeug-Dachsysteme GmbH, Bietingheim-Bissingen
("CTS")
On February 2, 2006, Magna acquired CTS, a leading manufacturer
of roof systems for the automotive industry. CTS manufactures
soft tops, hard tops and modular retractable hard tops. In
addition to Porsche, its customers include DaimlerChrysler,
Ferrari, Peugeot and General Motors. CTS has six facilities in
Europe and two facilities in North America.
The total consideration for the acquisition of CTS amounted to
$271 million, consisting of $203 million paid in cash and
$68 million of assumed debt. The excess purchase price over the
book value of assets acquired and liabilities assumed was
$197 million, including goodwill and intangible assets of
$123 million and $74 million, respectively.
(ii) Magna Golf Club
On August 25, 2006, the Company acquired the net assets of the
Magna Golf Club located in Aurora, Ontario from Magna
Entertainment Corp. ("MEC") for total cash consideration
$46 million. The transaction was reviewed by a Special
Committee of, and approved by the independent members of,
Magna's Board of Directors following the unanimous
recommendation of the Special Committee.
(iii) Fontana Golf and Sports Club
On November 1, 2006, the Company purchased the Fontana Golf and
Sports Club in Austria from MEC for total consideration of
$38 million. The transaction was reviewed by a Special
Committee of, and approved by the independent members of,
Magna's Board of Directors following the unanimous
recommendation of the Special Committee.
(iv) Other
During 2006, the Company also acquired a number of small
manufacturing and engineering facilities. Total consideration
for these acquisitions amounted to $19 million, consisting of
$18 million paid in cash and $1 million of assumed debt.
(b) For the year ended December 31, 2005
(i) Tesma
On February 6, 2005, Magna acquired the 56% equity interest in
Tesma international Inc. ("Tesma") that it did not previously
own for total consideration of $613 million, which was
satisfied by issuing 6.7 million Magna Class A Subordinate
Voting Shares and cash of $103 million. In addition, Magna
assumed responsibility for the existing stock options of Tesma,
resulting in an increase in the purchase price of $17 million,
representing the approximate fair value of the stock options
assumed. The excess of the purchase price over the Company's
incremental interest in the book value of the assets acquired
and liabilities assumed was $270 million, including fixed
assets of $50 million, intangible assets of $119 million,
goodwill of $155 million and future taxes liabilities of
$54 million.
(ii) Decoma
On March 6, 2005, Magna acquired the 27% equity interest in
Decoma International Inc. ("Decoma") that it did not
previously own for total consideration of $239 million, which
was satisfied by issuing 2.9 million Magna Class A Subordinate
Voting Shares and cash of $31 million. In addition, Magna
assumed responsibility for the existing stock options of
Decoma, resulting in an increase in the purchase price of
$2 million, representing the approximate fair value of the
stock options assumed. The excess of the purchase price over
the Company's incremental interest in the book value of the
assets acquired and liabilities assumed was $78 million,
including fixed assets of $29 million, goodwill of $59 million
and future taxes liabilities of $10 million.
(iii) Intier
On April 3, 2005, Magna acquired the 15% equity interest in
Intier Automotive Inc. ("Intier") that it did not previously
own for total consideration of $202 million, which was
satisfied by issuing 2.3 million Magna Class A Subordinate
Voting Shares and cash of $50 million. In addition, Magna
assumed responsibility for the existing stock options of Intier
resulting in an increase in the purchase price of $23 million,
representing the approximate fair value of the stock options
assumed. The excess of the purchase price over the Company's
incremental interest in the book value of the assets acquired
and liabilities assumed was $87 million, including fixed assets
of $19 million, intangible assets of $40 million, goodwill of
$47 million and future taxes liabilities of $19 million.
(iv) Other
During 2006, the purchase equations for the Privatizations were
finalized which resulted in a net change to the Company's
consolidated balance sheet consisting of a decrease in fixed
assets of $206 million, and increases in other assets, goodwill
and future tax liabilities of $141 million, $45 million and
$20 million, respectively.
During 2005, the Company also completed the acquisition of a
number of small manufacturing facilities. The total
consideration for the above noted acquisitions amounted to
approximately $21 million (net of cash acquired) paid in cash
and $12 million of assumed debt.
4. WARRANTY
The following is a continuity of the Company's warranty accruals:
2006 2005
---------------------------------------------------------------------
Balance, beginning of period $ 96 $ 57
Expense, net 7 13
Settlements (5) (8)
Acquisition 6 -
Foreign exchange and other 2 (3)
---------------------------------------------------------------------
Balance, March 31, 106 59
Expense, net 7 24
Settlements (3) (2)
Foreign exchange and other 5 (4)
---------------------------------------------------------------------
Balance, June 30, 115 77
Expense (income), net (39) 14
Settlements (9) (2)
Foreign exchange and other - (2)
---------------------------------------------------------------------
Balance, September 30, 67 87
Expense, net 28 20
Settlements (10) (9)
Foreign exchange and other 3 (2)
---------------------------------------------------------------------
Balance, December 31, $ 88 $ 96
---------------------------------------------------------------------
---------------------------------------------------------------------
5. EMPLOYEE FUTURE BENEFIT PLANS
The Company recorded employee future benefit expenses as follows:
Three months ended Year ended
December 31, December 31,
-------------------- --------------------
2006 2005 2006 2005
---------------------------------------------------------------------
Defined benefit pension
plans and other $ 7 $ 9 $ 23 $ 20
Termination and long
service arrangements 5 6 19 17
Retirement medical
benefits plan 5 2 14 9
---------------------------------------------------------------------
$ 17 $ 17 $ 56 $ 46
---------------------------------------------------------------------
---------------------------------------------------------------------
6. CAPITAL STOCK
(a) Changes in the Class A Subordinate Voting Shares for the three
months and year ended December 31, 2006 are shown in the
following table (numbers of shares in the following table are
expressed in whole numbers):
Subordinate Voting
------------------------
Number of Stated
shares value
---------------------------------------------------------------
Issued and outstanding at
December 31, 2005 108,184,395 $ 2,470
Issued for cash under the
Incentive Stock Option Plan 166,209 11
Issued under the Dividend
Reinvestment Plan 5,770 1
---------------------------------------------------------------
Issued and outstanding at
March 31, 2006 108,356,374 2,482
Issued for cash under the
Incentive Stock Option Plan 140,535 10
Issued under the Dividend
Reinvestment Plan 3,302 -
Repurchase of Class A Subordinate
Voting Shares(i) - (6)
---------------------------------------------------------------
Issued and outstanding at
June 30, 2006 108,500,211 2,486
Issued for cash under the
Incentive Stock Option Plan 10,137 1
Issued under the Dividend
Reinvestment Plan 2,835 -
---------------------------------------------------------------
Issued and outstanding at
September 30, 2005 108,513,183 2,487
Issued for cash under the
Incentive Stock Option Plan 271,028 18
Issued under the Dividend
Reinvestment Plan 2,126 -
Conversion of Class B Shares to
Class A Subordinate Voting Shares 1,050 -
---------------------------------------------------------------
Issued and outstanding at
December 31, 2006 108,787,387 $ 2,505
---------------------------------------------------------------
---------------------------------------------------------------
(i) During the year ended December 31, 2006, 80,407 Magna
Class A Subordinate Voting Shares, which were purchased
for cash consideration of $6 million, were awarded on a
restricted basis to an executive. Since this stock has
not been released to the executive, it has been reflected
as a reduction in the stated value of the Company's
Class A Subordinate Voting Shares.
(b) The following table presents the maximum number of shares that
would be outstanding if all the dilutive instruments
outstanding at February 23, 2007 were exercised or converted:
Class A Subordinate Voting and Class B Shares 109,944,722
Subordinated Debentures(i) 1,096,589
Stock options(ii) 4,015,541
---------------------------------------------------------------
115,056,852
---------------------------------------------------------------
---------------------------------------------------------------
(i) The above amounts include shares issuable if the holders
of the 6.5% Convertible Subordinated Debentures exercise
their conversion option but exclude Class A Subordinate
Voting Shares issuable, only at the Company's option, to
settle interest and principal related to the 6.5%
Convertible Subordinated Debentures. The number of Class
A Subordinate Voting Shares issuable at the Company's
option is dependent on the trading price of the Class A
Subordinate Voting Shares at the time the Company elects
to settle the 6.5% Convertible Subordinated Debenture
interest and principal with shares.
The above amounts also exclude Class A Subordinate Voting
Shares issuable, only at the Company's option, to settle
the 7.08% Subordinated Debentures on redemption or
maturity. The number of shares issuable is dependent on
the trading price of Class A Subordinate Voting Shares at
redemption or maturity of the 7.08% Subordinated
Debentures.
(ii) Options to purchase Class A Subordinate Voting Shares are
exercisable by the holder in accordance with the vesting
provisions and upon payment of the exercise price as may
be determined from time to time pursuant to the Company's
stock option plans.
7. STOCK BASED COMPENSATION
(a) The following is a continuity schedule of options outstanding
(number of options in the table below are expressed in whole
numbers):
2006 2005
-------------------------------- -------------------------------
Options outstanding Options outstanding
--------------------- --------------------
Options Options
Exercise exercis- Exercise exercis-
Options price(i) able Options price(i) able
No. Cdn$ No. No. Cdn$ No.
-------------------------------------------------------------------------
Beginning
of year 4,600,039 75.46 4,116,104 2,614,376 85.74 2,042,876
Assumed on
privati-
zation - - - 1,053,353 71.31 864,688
Granted 115,000 87.80 - 35,000 85.75 -
Exercised (166,209) 58.32 (166,209) (170,106) 61.09 (170,106)
Vested - - 80,100 - - 9,291
Cancelled (17,001) 93.35 (12,059) - - -
-------------------------------------------------------------------------
March 31 4,531,829 76.33 4,017,936 3,532,623 82.62 2,746,749
Assumed on
privati-
zation - - - 1,377,067 54.11 973,668
Exercised (140,535) 62.92 (140,535) (80,486) 53.67 (80,486)
Vested - - 8,138 - - 11,775
Cancelled (6,862) 73.11 (2,658) (17,033) 84.60 -
-------------------------------------------------------------------------
June 30 4,384,432 76.76 3,882,881 4,812,171 74.94 3,651,706
Exercised (10,137) 65.55 (10,137) (152,211) 60.56 (152,211)
Vested - - 107,004 - - 281,020
Cancelled (15,198) 107.83 (15,198) (4,506) 94.66 (1,163)
-------------------------------------------------------------------------
September
30 4,359,097 76.68 3,964,550 4,655,454 75.39 3,779,352
Exercised (271,028) 65.16 (271,028) (40,886) 61.20 (40,886)
Vested - - 118,429 - - 386,936
Cancelled (820) 60.25 (615) (14,529) 95.05 (9,298)
-------------------------------------------------------------------------
December
31 4,087,249 77.45 3,811,336 4,600,039 75.46 4,116,104
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) The exercise price noted above represents the weighted
average exercise price in Canadian dollars.
(b) The fair value of stock options is estimated at the date of
grant using the Black Scholes option pricing model. 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 Six months ended
December 31, December 31,
--------------------- ---------------------
2006 2005 2006 2005
---------------------------------------------------------------
Risk free interest rate - - 3.99% 3.24%
Expected dividend yield - - 2.05% 2.18%
Expected volatility - - 23% 23%
Expected time until
exercise - - 4 years 2 years
---------------------------------------------------------------
Weighted average fair
value of options
granted or modified
in period (Cdn$) $ - $ - $ 14.89 $ 18.48
---------------------------------------------------------------
Compensation expense
recorded in selling,
general and
administrative
expenses $ 1 $ 2 $ 5 $ 11
---------------------------------------------------------------
(c) During 2006, $7 million (2005 - $4 million; 2004 - $3 million)
has been charged to compensation expense relating to the
restricted stock arrangements. At December 31, 2006,
unamortized compensation expense related to the restricted
stock arrangements was $42 million, and has been presented as a
reduction of shareholders' equity.
(d) Contributed surplus consists of accumulated stock-based
compensation expense less the fair value of options at the
grant date that have been exercised and reclassified to share
capital, the accumulated restricted stock compensation expense,
and the value of the holders conversion option on the 6.5%
Convertible Subordinated Debentures. The following is a
continuity of contributed surplus:
2006 2005
---------------------------------------------------------------
Balance, beginning of year $ 62 $ 16
Impact of privatization
transactions (note 7) - 20
Stock-based compensation expense 2 2
Exercise of options (3) (5)
---------------------------------------------------------------
Balance, March 31, 61 33
Impact of privatization
transaction (note 7) - 25
Stock-based compensation expense 3 5
Exercise of options (3) (2)
---------------------------------------------------------------
Balance, June 30, 61 61
Stock-based compensation expense 4 3
Exercise of options - (3)
---------------------------------------------------------------
Balance, September 30, 65 61
Stock-based compensation expense 3 2
Exercise of options (6) (1)
---------------------------------------------------------------
Balance, December 31, 62 62
Holders conversion option 3 3
---------------------------------------------------------------
$ 65 $ 65
---------------------------------------------------------------
---------------------------------------------------------------
8. SEGMENTED INFORMATION
The following table shows certain information with respect to segment
disclosures:
Three months ended
December 31, 2006
-------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 1,577 $ 1,518 $ 1,065
United States 1,361 1,320 1,096
Mexico 441 395 368
Eliminations (132) - -
---------------------------------------------------------------------
3,247 3,233 $ 40 2,529
Europe
Euroland 2,630 2,583 1,032
Great Britain 272 272 84
Other European countries 164 188 118
Eliminations (1) - -
---------------------------------------------------------------------
3,065 3,043 (35) 1,234
Rest of World 103 92 4 127
Corporate and Other (47) - 27 224
---------------------------------------------------------------------
Total reportable segments $ 6,368 $ 6,368 $ 36 4,114
Current assets 7,060
Investments, goodwill and
other assets 1,980
---------------------------------------------------------------------
Consolidated total assets $ 13,154
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended
December 31, 2005
-------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 1,719 $ 1,647 $ 1,078
United States 1,394 1,339 1,242
Mexico 332 321 337
Eliminations (125) - -
---------------------------------------------------------------------
3,320 3,307 $ 194 2,657
Europe
Euroland 2,233 2,183 1,128
Great Britain 216 213 66
Other European countries 137 101 87
Eliminations (53) - -
---------------------------------------------------------------------
2,533 2,497 (93) 1,281
Rest of World 57 50 (3) 83
Corporate and Other (56) - 28 103
---------------------------------------------------------------------
Total reportable segments $ 5,854 $ 5,854 $ 126 4,124
Current assets 6,603
Investments, goodwill and
other assets 1,594
---------------------------------------------------------------------
Consolidated total assets $ 12,321
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) EBIT represents operating income before interest income or
expense.
Year ended
December 31, 2006
-------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 6,410 $ 6,165 $ 1,065
United States 5,594 5,403 1,096
Mexico 1,644 1,493 368
Eliminations (540) - -
---------------------------------------------------------------------
13,108 13,061 $ 575 2,529
Europe
Euroland 9,485 9,323 1,032
Great Britain 956 954 84
Other European countries 621 541 118
Eliminations (143) - -
---------------------------------------------------------------------
10,919 10,818 126 1,234
Rest of World 343 301 - 127
Corporate and Other (190) - 77 224
---------------------------------------------------------------------
Total reportable segments $ 24,180 $ 24,180 $ 778 4,114
Current assets 7,060
Investments, goodwill and
other assets 1,980
---------------------------------------------------------------------
Consolidated total assets $ 13,154
---------------------------------------------------------------------
---------------------------------------------------------------------
Year ended
December 31, 2005
-------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 6,513 $ 6,215 $ 1,078
United States 5,714 5,468 1,242
Mexico 1,123 1,071 337
Eliminations (551) - -
---------------------------------------------------------------------
12,799 12,754 $ 733 2,657
Europe
Euroland 8,714 8,533 1,128
Great Britain 918 904 66
Other European countries 580 442 87
Eliminations (190) - -
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10,022 9,879 82 1,281
Rest of World 209 178 2 83
Corporate and Other (219) - 131 103
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Total reportable segments $ 22,811 $ 22,811 $ 948 4,124
Current assets 6,603
Investments, goodwill and
other assets 1,594
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Consolidated total assets $ 12,321
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(i) EBIT represents operating income before interest income or
expense.
9. RELATED PARTY TRANSACTIONS
On March 31, 2006, the Company purchased a real estate property
located in the United States from MEC for a total purchase price of
$6 million.
On August 25, 2006 and November 1, 2006 the Company purchased the
Magna Golf Club and Fontana Golf and Sports Club, respectively, from
MEC (see note 3).
10. SUBSEQUENT EVENTS
On January 15, 2007, the Company acquired two facilities from Pressac
Investments Limited for $55 million ( (euro) 43 million). The
facilities in Germany and Italy manufacture electronic components for
sale to various customers, including Volkswagen, DaimlerChrysler and
Fiat.
11. 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 call (905)
726-7103
