AURORA, ON, Feb. 27 /PRNewswire-FirstCall/ - Magna International Inc.
today reported financial results for the fourth quarter and year ended December 31, 2007.
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THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
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2007 2006 2007 2006
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Sales $ 6,836 $ 6,368 $ 26,067 $ 24,180
Operating income $ 203 $ 42 $ 1,152 $ 792
Net income $ 28 $ 29 $ 663 $ 528
Diluted earnings
per share $ 0.24 $ 0.26 $ 5.86 $ 4.78
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All results are reported in millions of U.S. dollars,
except per share figures.
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YEAR ENDED DECEMBER 31, 2007
---------------------------- We posted sales of $26.1 billion for 2007, an increase of 8% over 2006. This higher sales level was achieved as a result of increases in our North American, European and Rest of World production sales offset in part by reductions in complete vehicle assembly sales, and tooling, engineering and other sales. During 2007, North American and European average dollar content per vehicle increased 11% and 20% respectively, over 2006. During 2007, North American vehicle production declined 2% while European vehicle production increased 3%, each compared to 2006. Complete vehicle assembly sales decreased 8% to $4.0 billion for 2007 compared to $4.4 billion for 2006 and complete vehicle assembly volumes decreased 19% to approximately 200,000 units. During 2007, operating income was $1.152 billion, net income was $663 million and diluted earnings per share were $5.86. Excluding the unusual items recorded during 2007 and 2006 (see "Unusual Items" below), operating income increased $257 million, net income increased $202 million, and diluted earnings per share increased $1.65. During 2007, we generated cash from operations before changes in non-cash operating assets and liabilities of $1.7 billion, and invested $94 million in non-cash operating assets and liabilities. Total investment activities for 2007 were $977 million, including $741 million in fixed asset additions, a $190 million increase in investments and other assets, and $46 million to purchase subsidiaries. THREE MONTHS ENDED DECEMBER 31, 2007 ------------------------------------ We posted sales of $6.8 billion for the fourth quarter ended December 31, 2007, an increase of 7% over the fourth quarter of 2006. This higher sales level was achieved as a result of increases in North American, European and Rest of World production sales, offset in part by reductions in complete vehicle assembly sales, and tooling, engineering and other sales. During the fourth quarter of 2007, North American and European average dollar content per vehicle increased 13% and 26% respectively, over the comparable quarter in 2006. During the fourth quarter of 2007, North American vehicle production increased by 1% and European vehicle production declined 1%, each compared to the fourth quarter of 2006. Complete vehicle assembly sales decreased 21% to $981 million for the fourth quarter of 2007 compared to $1.25 billion for the fourth quarter of 2006 and complete vehicle assembly volumes decreased 36% to approximately 42,000 units. During the fourth quarter of 2007, operating income was $203 million, net income was $28 million and diluted earnings per share were $0.24. Excluding unusual items recorded during the fourth quarters of 2007 and 2006 (see "Unusual Items" below), operating income increased $102 million, net income increased $63 million, and diluted earnings per share increased $0.46. During the three months ended December 31, 2007, we generated cash from operations before changes in non-cash operating assets and liabilities of $429 million, and generated $400 million from non-cash operating assets and liabilities. Total investment activities for the fourth quarter of 2007 were $320 million, including $305 million in fixed asset additions, and a $15 million increase in investments and other assets. UNUSUAL ITEMS ------------- During the years ended December 31, 2007 and 2006, we recorded a number of unusual items: impairment charges related to long-lived assets; a valuation allowance on future income tax assets; restructuring charges associated with the assessment of our global operating structure and capacity; and other charges and gains. The impact of these unusual items on operating income, net income and diluted earnings per share was as follows:
Three months ended Year ended
December 31, December 31,
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2007 2006 2007 2006
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Operating Income $ (32) $ (91) $ (45) $ (148)
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Net Income $ (144) $ (80) $ (183) $ (116)
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Earnings per share $ (1.21) $ (0.73) $ (1.61) $ (1.04)
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A more detailed discussion of our consolidated financial results for the fourth quarter and year ended December 31, 2007 is contained in the Management's Discussion and Analysis of Results of Operations and Financial Position, and the unaudited interim consolidated financial statements and notes thereto, which are attached to this Press Release. DIVIDEND -------- Yesterday, our Board of Directors declared a quarterly dividend with respect to our outstanding Class A Subordinate Voting Shares and Class B Shares for the quarter ended December 31, 2007. The dividend of U.S. $0.36 per share is payable on March 19, 2008 to shareholders of record on March 10, 2008. UPDATED 2008 OUTLOOK -------------------- For the full year 2008, we expect our consolidated sales to be between $24.9 billion and $26.2 billion, based on full year 2008 light vehicle production volumes of approximately 14.4 million units in North America and approximately 15.6 million units in Europe. Full year 2008 average dollar content per vehicle is expected to be between $845 and $875 in North America and between $450 and $475 in Europe. We expect our full year 2008 complete vehicle assembly sales to be between $3.6 billion and $3.9 billion. In addition, we expect that full year 2008 spending for fixed assets will be in the range of $925 million to $975 million. This 2008 outlook assumes no significant acquisitions or divestitures, and no significant labour disruptions in our principal markets. In addition, we have assumed that foreign exchange rates for the most common currencies in which we conduct business relative to our U.S. dollar reporting currency will approximate current rates. We are a leading global supplier of technologically advanced automotive systems, assemblies, modules and components. We design, develop and manufacture automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles, primarily for sale to original equipment manufacturers ("OEMs") of cars and light trucks in North America, Europe, Asia, South America and Africa. Our product capabilities span a number of major automotive areas including: the design, engineering, testing and manufacture of automotive: interior systems; seating systems; closure systems; metal body and chassis systems; vision systems; electronic systems; exterior systems; powertrain systems; roof systems; as well as complete vehicle engineering and assembly. We have approximately 84,000 employees in 241 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 Wednesday, February 27, 2008 at
8:00 a.m. EST. The conference call will be chaired by Vincent J. Galifi,
Executive Vice-President and Chief Financial Officer. The number to use
for this call is 1-800-940-0570. The number for overseas callers is
1-212-231-2900. 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
Wednesday 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 Karin Kaminski 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, without limitation: shifting OEM market shares, declining production volumes and changes in consumer demand for vehicles; a reduction in the production volumes of certain vehicles, such as certain light trucks; our ability to compete with suppliers with operations in low cost countries; our ability to offset price concessions demanded by our customers; our dependence on outsourcing by our customers; 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; 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; the termination or non-renewal by our customers of any material contracts; our ability to fully recover pre-production expenses; warranty and recall costs; product liability claims in excess of our insurance coverage; expenses related to the restructuring and rationalization of some of our operations; impairment charges; our ability to successfully identify, complete and integrate acquisitions; risks associated with program launches; legal claims against us; risks of conducting business in foreign countries, including Russia; work stoppages and labour relations disputes; changes in laws and governmental regulations; costs associated with compliance with environmental laws and regulations; the fact that we may be considered to be effectively controlled, indirectly, by the Stronach Trust and OJSC Russian Machines ("Russian Machines") for so long as the governance arrangements remain in place between them; potential conflicts of interest involving the Stronach Trust and Russian Machines; the risk that the benefits, growth prospects and strategic objectives expected to be realized from the investment by, and strategic alliance with, Russian Machines may not be fully realized, may take longer to realize than expected or may not be realized at all; the possibility that the governance arrangements between the Stronach Trust and Russian Machines may terminate in certain circumstances; 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, 2007 included in this Press Release, and the audited consolidated financial statements and MD&A for the year ended December 31, 2006 included in our 2006 Annual Report to Shareholders. The unaudited interim consolidated financial statements for the three months and year ended December 31, 2007 have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") with respect to the preparation of interim financial information and the audited consolidated financial statements for the year ended December 31, 2006 have been prepared in accordance with Canadian GAAP. This MD&A has been prepared as at February 25, 2008.
OVERVIEW
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We are a leading global supplier of technologically advanced automotive systems, assemblies, modules and components. We design, develop and manufacture automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles, primarily for sale to original equipment manufacturers ("OEMs") of cars and light trucks in North America, Europe, Asia, South America and Africa. Our product capabilities span a number of major automotive areas including: the design, engineering, testing and manufacture of automotive: interior systems; seating systems; closure systems; metal body and chassis systems; vision systems; electronic systems; exterior systems; powertrain systems; roof systems; as well as complete vehicle engineering and assembly. We follow a corporate policy of functional and operational decentralization, pursuant to which we conduct our operations through divisions, each of which is an autonomous business unit operating within pre-determined guidelines. As at December 31, 2007, we had 241 manufacturing divisions and 62 product development and engineering centres in 23 countries. Our operations are segmented on a geographic basis between North America, Europe and Rest of World (primarily Asia, South America and Africa). A co-Chief Executive Officer heads management in each of our two primary markets, North America and Europe. The role of the North American and European management teams is to manage our interests to ensure a coordinated effort across our different 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. HIGHLIGHTS ------------------------------------------------------------------------- We are pleased with our 2007 results, including higher sales, average dollar content per vehicle in both North America and Europe, operating income, net income, and diluted earnings per share. Our improved results were achieved despite lower vehicle production volumes in North America, particularly at General Motors ("GM") and Ford Motor Company ("Ford"), lower complete vehicle assembly volumes and sales, and continuing price concessions given to our customers. We also had a number of other achievements in 2007, including the successful launch or ramp-up of a significant amount of business, important new business awards, and supplier awards from a number of our customers, including GM, Ford, Toyota and Honda. In North America, much of the new business we launched was in the crossover utility vehicle segment, which has grown rapidly in the past few years. We are well represented in a number of product areas in this high growth segment. Finally, in 2007 we continued to grow our business and manufacturing footprint outside of our traditional markets of North America and Western Europe, which contributed to a 53% increase in Rest of World production sales. Our growth in Rest of World sales is important, since much of the future growth in global vehicle production is expected to occur in emerging markets such as Russia, various countries in Eastern Europe and Asia. In addition to the launch or ramp-up of new business, our improved results reflect operating efficiencies we realized at some of our facilities and progress we made at certain underperforming divisions. Despite the many positives we achieved, 2007 also proved to be a difficult year in a number of respects. In addition to the industry challenges mentioned above, we continued to incur losses at a number of underperforming facilities, particularly at certain powertrain and interiors facilities in North America. Furthermore, our 2007 results were adversely impacted by fixed asset impairment charges in North America and Europe, restructuring charges related to facility closures and rationalizations as we continue to migrate our manufacturing footprint towards lower cost countries, and certain tax-related charges. Although no significant acquisitions or dispositions were made during 2007, we completed a plan of arrangement with Russian Machines and signed a unique Framework of Fairness Agreement with the Canadian Auto Workers' union. We also completed a substantial issuer bid pursuant to which we purchased for cancellation 11.9 million Class A Subordinate Voting Shares. In addition to the substantial issuer bid, we also purchased 2.7 million Class A Subordinate Voting Shares under an ongoing normal course issuer bid, which allows for the purchase of an additional 6.3 million shares before its expiry on November 11, 2008. We ended 2007 with a strong balance sheet, including a substantial net cash position. We expect that our net cash will help us "weather the storm" in the industry and provide opportunities to continue to grow our business and further enhance shareholder value. During 2007, we recorded sales of $26.1 billion, an increase of 8% over 2006. This higher sales level was achieved as a result of growth in our North American, European and Rest of World production sales offset in part by a decrease in complete vehicle assembly sales, and tooling, engineering and other sales. During 2007, our North American and European dollar content per vehicle increased by 11% and 20%, respectively, over 2006. In addition, during 2007, North American vehicle production decreased 2% while European vehicle production levels increased 3%, each compared to 2006. We reported strong sales in 2007 despite the fact that two of our largest customers in North America continued to reduce vehicle production levels. While overall North American vehicle production volumes declined 2% in 2007 compared to 2006, GM and Ford vehicle production declined by 8% and 7%, respectively. Operating income for 2007 increased 45% or $360 million to $1.15 billion from $792 million for 2006. Excluding the unusual items recorded in 2007 and 2006 (see "Unusual Items" below), operating income for 2007 increased $257 million or 27%. The increase in operating income excluding unusual items was primarily due to additional margins earned on the launch of new programs during or subsequent to 2006, increased margins earned on higher volumes for certain production programs and productivity and efficiency improvements at certain facilities, including underperforming divisions. These factors were partially offset by operational inefficiencies and other costs at certain underperforming facilities, including certain powertrain and interiors facilities in North America, lower margins earned as a result of a decrease in production volumes, costs incurred in preparation for upcoming launches or for programs that have not fully ramped up production, higher employee profit sharing and incentive compensation and incremental customer price concessions. Net income for 2007 increased 26% or $135 million to $663 million from $528 million for 2006. Excluding the unusual items recorded in 2007 and 2006 (see "Unusual Items" below), net income for 2007 increased 31% or $202 million. The increase in net income excluding unusual items was primarily a result of the increase in operating income (excluding unusual items) partially offset by higher income taxes (excluding unusual items). Income taxes were higher due to higher operating income partially offset by a decrease in our effective tax rate as described in the "Incomes Taxes" section below. Diluted earnings per share for 2007 increased 23% or $1.08 to $5.86 from $4.78 for 2006. Excluding the unusual items recorded in 2007 and 2006 (see "Unusual Items" below), diluted earnings per share increased 28% or $1.65 primarily as a result of the increase in net income (excluding unusual items) partially offset by an increase in the weighted average number of diluted shares outstanding in 2007, primarily as a result of the Class A Subordinate Voting Shares issued in 2007 related to the Arrangement, as discussed in the "Capital Transactions" section below, and stock options exercised during 2006 and 2007, partially offset by the repurchase and cancellation of Class A Subordinate Voting Shares under the terms of our fully completed Substantial Issuer Bid and ongoing Normal Course Issuer Bid.
UNUSUAL ITEMS
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During 2007 and 2006, we recorded certain unusual items as follows:
2007 2006
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Diluted Diluted
Operating Net Earnings Operating Net Earnings
Income Income per Share Income Income per Share
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Impairment
charges(1) $ (56) $ (40) $ (0.35) $ (54) $ (46) $ (0.41)
Restructuring
charges(2) (39) (27) (0.24) (77) (65) (0.58)
Sale of
facilities(3) (12) (7) (0.06) (17) (15) (0.14)
Sale of
property(4) 36 30 0.26 - - -
Foreign
currency
gain(4) 26 24 0.21 - - -
Valuation
allowance on
future tax
assets(5) - (115) (1.01) - - -
Future tax
(charge)
recovery(5) - (48) (0.42) - 10 0.09
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Total unusual
items $ (45) $ (183) $ (1.61) $ (148) $ (116) $ (1.04)
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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 long-lived asset
impairment charges as follows:
2007 2006
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Operating Net Operating Net
Income Income Income Income
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Europe $ 12 $ 12 $ 41 $ 38
North America 44 28 13 8
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$ 56 $ 40 $ 54 $ 46
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Europe
Due to recurring losses that were projected to continue as a result
of existing sales levels and limited sales growth prospects, during
2007 we recorded asset impairments of $12 million relating to certain
assets and facilities in Germany, Austria, the Czech Republic and
Spain.
During 2006, we recorded asset impairments of $41 million related 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 at an
exterior systems facility in Germany, a powertrain systems facility
in Austria, interior systems facilities in the United Kingdom and
Spain and a seating systems facility in the Czech Republic.
North America
During 2007, we recorded asset impairments of $44 million related to
an interiors systems facility in the United States and certain
powertrain facilities in the United States and Canada. The asset
impairments were recorded as a result of: (i) ceasing operations
and/or use of certain assets at two powertrain facilities; and (ii)
losses that were projected to be incurred throughout the business
planning period based on existing and projected sales levels.
During 2006, we recorded asset impairments of $13 million related to
certain interior systems facilities in the United States. The asset
impairments were recorded as a result of losses that were projected
to be incurred throughout our business planning period based on
existing and projected sales levels.
(2) Restructuring Charges
Europe
During 2007, we recorded restructuring charges of $4 million related
to the closure of a sunvisors facility in Spain. During 2006, we
recorded restructuring charges of $43 million related primarily to
closure costs of a mirrors facility in Ireland and an exterior
systems facility in Belgium.
North America
In North America, restructuring charges totalled $35 million for 2007
and $34 million for 2006. Specifically, in 2007 we recorded
$12 million related to the closure of exterior systems facilities in
Canada and the United States, $10 million related to the
consolidation of powertrain facilities in Canada and $9 million
related to the closure of a mirror facility in the United States. The
balance of restructuring and rationalization charges related to a
stamping facility in the United States.
The restructuring charges in 2006 related primarily to rightsizing a
powertrain facility in the United States and restructuring and
rationalization charges related primarily to certain powertrain and
seating facilities in the United States.
In addition, we may incur additional restructuring and
rationalization charges during 2008.
(3) Sale of Facilities
During 2007, we entered into an agreement to sell an underperforming
exterior systems facility in Germany. As a result, we incurred a
$12 million loss on disposition of the facility. During 2006, we sold
two underperforming powertrain facilities, which resulted in losses
on disposition of $12 million and $5 million in Europe and North
America, respectively.
(4) Other Unusual Items
During 2007 we recorded the following unusual items:
- we disposed of land and building in the United Kingdom and
recorded a gain on disposal of $36 million; and
- a $26 million foreign currency gain on the repatriation of funds
from Europe.
(5) Income Taxes
In conjunction with our annual goodwill and long-lived asset
impairment analyses, during the fourth quarter of 2007, we recorded a
$115 million charge to establish valuation allowances against certain
of our future tax assets in the United States.
Accounting standards require that we assess whether valuation
allowances should be established against our future income tax assets
based on the consideration of all available evidence using a "more
likely than not" standard. The factors we use to assess the
likelihood of realization are our past history of earnings, forecast
of future taxable income and available tax planning strategies that
could be implemented to realize the future tax assets. During 2007,
we determined that valuation allowances were required in the United
States based on:
- three year historical cumulative losses at our interior systems
and powertrain operations;
- the deterioration of near-term automotive market conditions in the
United States; and
- significant and inherent uncertainty as to the timing of when we
would be able to generate the necessary level of earnings to
recover these future tax assets.
Also during 2007, we recorded a $53 million charge to future income
tax expense as a result of an alternative minimum tax introduced in
Mexico, offset in part by a $5 million future income tax recovery
related to a reduction in future income tax.
During 2006, we recorded a $10 million future income tax recovery as
a result of a reduction in future income tax rates in Canada.
CAPITAL TRANSACTIONS
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During 2007, following approval by our Class A and Class B shareholders, we completed the court-approved plan of arrangement (the "Arrangement") whereby OJSC Russian Machines ("Russian Machines"), a wholly owned subsidiary of Basic Element Limited ("Basic Element"), made a major strategic investment in Magna. Russian Machines represents the Machinery Sector of Basic Element, and includes automobile manufacturer GAZ Group, airplane manufacturer Aviacor and train car manufacturer Abakanvagonmash. Basic Element is a diversified holding company founded in 1997 with assets in Russia, countries of the Commonwealth of Independent States, Europe, Africa, South America and Australia.
In accordance with the Arrangement:
- Russian Machines invested $1.54 billion to indirectly acquire
20 million of our Class A Subordinate Voting Shares from treasury.
- We purchased 217,400 Class B Shares for cancellation, representing
all of our outstanding Class B Shares, other than those indirectly
controlled by the Stronach Trust, for $24 million and the number of
votes per each Class B Share was reduced from 500 votes to 300 votes.
- The Stronach Trust and certain members of our executive management
combined their respective shareholdings in Magna (in the case of
executive management, a portion of their shareholdings), together
with the 20 million Class A Subordinate Voting Shares issued as part
of the Arrangement into a new Canadian holding company, M Unicar Inc.
("M Unicar"). At September 20, 2007, M Unicar indirectly held 100% of
our outstanding Class B Shares and approximately 16% of our
outstanding Class A Subordinate Voting Shares collectively
representing approximately 68.8% of the votes attached to all the
Class A Subordinate Voting Shares and Class B Shares then
outstanding.
On September 25, 2007, we also completed the previously announced substantial issuer bid ("SIB") pursuant to which we purchased for cancellation 11.9 million Class A Subordinate Voting Shares, representing 9.2% of our issued and outstanding Class A Subordinate Voting Shares for an aggregate purchase price of $1.1 billion. Following completion of the SIB M Unicar held shares collectively representing approximately 71.0% of the votes attached to all of our Class A Subordinate Voting Shares and Class B Shares then outstanding. On November 12, 2007, we commenced a normal course issue bid ("NCIB") to purchase for cancellation and/or for purposes of our long-term retention (restricted stock), restricted stock unit and similar programs, up to 9 million of our Class A Subordinate Voting Shares. As at December 31, 2007, we had purchased for cancellation approximately 2.5 million Class A Subordinate Voting Shares and had also purchased approximately 134,000 Class A Subordinate Voting Shares for an aggregate purchase price of $219 million. The NCIB will expire on November 11, 2008, unless extended by us prior to that time. INDUSTRY TRENDS AND RISKS ------------------------------------------------------------------------- A number of trends continue to have a significant impact on the global automotive industry and our business, including:
- declining North American production volumes;
- the increasing market share of Asian-based OEMs in North America and
Europe and the declining market share and deteriorating financial
condition of some of our traditional customers in these markets;
- the exertion of significant pricing pressure, primarily by North
American and European OEMs, including through pre-determined price
concessions, significant demands for retroactive price reductions and
increased transfer of warranty costs, design and engineering
expenses, as well as tooling costs;
- increased exposure to prices for steel, resin, paints/chemicals and
other raw materials and commodities, as well as energy prices;
- the deteriorating financial condition of the automotive supply base,
particularly in North America, and the corresponding increase in
operational and financial exposure as many such suppliers become
bankrupt or insolvent;
- the growth of the automotive industry in China, Korea, Thailand,
India, Russia, Brazil and other low cost countries, and the migration
of component and vehicle design, development, engineering and
manufacturing to such lower cost countries;
- growth of the A to D vehicle segments (micro to mid-size cars),
particularly in emerging markets;
- the increasing prevalence of vehicles built off high-volume global
vehicle platforms; and
- increasing customer and consumer demand for lighter, more fuel-
efficient and environmentally-friendly vehicles, with additional
safety features, improved comfort, convenience and space optimization
features 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 economic and political
conditions, including interest rates, energy prices and international
conflicts (including acts of terrorism). Automotive production is
affected by consumer demand and may be affected by the foregoing
macro factors as well as structural factors such as labour relations
issues, regulatory requirements, trade agreements and similar
matters. As a result of these and other factors, some of our
customers are currently experiencing and/or may in the future
experience reduced consumer demand for their vehicles, leading to
declining vehicle production volumes, which could have a material
adverse effect on our profitability.
- Although we supply parts to all of the leading OEMs, a significant
majority of our sales are to five such customers, three 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 five largest customers could have an
adverse effect on our profitability, particularly if we are unable to
further diversify our customer base.
- 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 a material adverse effect on our
profitability.
- The financial condition of some of our traditional customers has
deteriorated in recent years due in part to high labour costs
(including healthcare, pension and other post-employment benefit
costs), high raw materials, commodities and energy prices, declining
sales and other factors. Additionally, increased gas prices, have
affected and could further threaten sales of certain of their 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.
- 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 will likely 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. To the extent we refuse to make
price concessions to our customers they may not award new business to
us, which could also have a material adverse effect on our
profitability.
- 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 prior to the start of production and recover these costs
through amortization in the piece priceof 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. Warranty
provisions are established based on our best estimate of the amounts
necessary to settle existing or probable claims on product defect
issues. Recall costs are costs incurred when government regulators
and/or our customers decide to recall a product due to a known or
suspected performance issue, and we are required to participate
either voluntarily or involuntarily. Currently, under most customer
agreements, we only account for existing or probable warranty claims.
Under certain complete vehicle engineering and assembly contracts, we
record an estimate of future warranty-related costs based on the
terms of the specific customer agreements and the specific customer's
warranty experience. The obligation to repair or replace such
products could have a material adverse effect on our profitability
and financial condition if the actual costs are materially different
from such estimates.
- Prices for key raw materials and commodities used in our parts
production, particularly steel, resin, paints chemicals and other raw
materials, as well as energy prices, remain at elevated levels
compared to levels earlier this decade, with the possibility of
further increases in the future. We have attempted to mitigate our
exposure to commodities price increases, however, to the extent we
are unable to fully do so through hedging strategies, by engineering
products with reduced commodity content, by passing commodity price
increases to our customers or otherwise, 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 any such supplier could
disrupt the supply of components to us or our customers, potentially
causing the temporary shut-down of our or our customers' production
lines. Any prolonged disruption in the supply of critical components
to us or our customers, the inability to re-source production of a
critical component from a financially distressed automotive
components sub-supplier, or any temporary shut-down of one of our
production lines or the production lines of one of our customers,
could have a material adverse effect on our profitability.
Additionally, the insolvency, bankruptcy or financial restructuring
of any of our critical suppliers could result in us incurring
unrecoverable costs related to the financial work-out of such
suppliers and/or increased exposure for product liability, warranty
or recall costs relating to the components supplied by such suppliers
to the extent such supplier is not able to assume responsibility for
such amounts, which could have an adverse effect on our
profitability.
- We are dependent on the outsourcing of components, modules and
assemblies, as well as complete vehicles, by OEMs. The extent of OEM
outsourcing is influenced by a number of factors, including relative
cost, quality and timeliness of production by suppliers as compared
to OEMs, capacity utilization, and labour relations among OEMs, their
employees and unions. As a result of favourable terms in collective
bargaining agreements concluded in 2007, the "Detroit 3" OEMs may
insource some production which had previously been outsourced.
Outsourcing of complete vehicle assembly is particularly dependent on
the degree of unutilized capacity at the OEMs' own assembly
facilities, in addition to the foregoing factors. A reduction in
outsourcing by OEMs, or the loss of any material production or
assembly programs coupled with the failure to secure alternative
programs with sufficient volumes and margins, could have a material
adverse effect on our profitability.
- The competitive environment in the automotive industry has been
intensifying as our customers seek to take advantage of lower
operating costs in China, Korea, Thailand, India, Russia, Brazil and
other low cost countries. 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.
- Although our financial results are reported in U.S. dollars, a
significant portion of our sales and operating costs are realized in
Canadian dollars, euros, British pounds and other currencies. Our
profitability is affected by movements of the U.S. dollar against the
Canadian dollar, the euro, the British pound and other currencies in
which we generate revenues and incur expenses. However, as a result
of hedging programs employed by us, primarily in Canada, foreign
currency transactions are not fully impacted by the recent movements
in exchange rates. We record foreign currency transactions at the
hedged rate where applicable. Despite these measures, significant
long-term fluctuations in relative currency values, in particular a
significant change in the relative values of the U.S. dollar,
Canadian dollar, euro or British pound, could have an adverse effect
on our profitability and financial condition and any sustained
changes in such related currency values could adversely impact our
competitiveness in certain geographic regions.
- 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.
- 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 restructuring costs related to plant closings,
relocations and employee severance costs. Such costs could have an
adverse effect on our short-term profitability. In addition, we are
working to turn around financially underperforming divisions,
however, there is no guarantee that we will be successful in doing so
with respect to some or all such divisions.
- We recorded significant impairment charges related to goodwill,
future tax assets and fixed assets in recent years and may continue
to do so in the future. Goodwill must be tested for impairment
annually, or more frequently when an event occurs that more likely
than not reduces the fair value of a reporting unit below its
carrying value. We also evaluate our ability to realize future tax
assets and 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, insourcing and other new
business opportunities, program price and cost assumptions on current
and future business, the timing of new program launches and future
forecasted production volumes are not met, any resulting impairment
loss could have a material adverse effect on our profitability.
- We 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 to which we are party will have a
material adverse effect on our financial position, however, we cannot
provide any assurance to this effect.
RESULTS OF OPERATIONS
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Accounting Change
In January 2005, the Canadian Institute of Chartered Accountants approved Handbook Sections 1530 "Comprehensive Income", 3855 "Financial Instruments - Recognition and Measurement", 3861 "Financial Instruments - Disclosure and Presentation", and 3865 "Hedges". We adopted these new recommendations effective January 1, 2007 with no restatement of prior periods, except to classify the currency translation adjustment as a component of accumulated other comprehensive income. With the adoption of these new standards, our accounting for financial instruments and hedges complies with U.S. GAAP in all material respects on January 1, 2007. Financial Instruments Under the new standards, all of our financial assets and financial liabilities are classified as held for trading, held to maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. Held for trading financial instruments, which include cash and cash equivalents, are measured at fair value and all gains and losses are included in net income in the period in which they arise. Held to maturity investments are recorded at amortized cost using the effective interest method, and include long-term interest bearing government securities held to partially fund certain Austrian lump sum termination and long service payment arrangements and our investment in asset-backed commercial paper ("ABCP"). Loans and receivables, which include accounts receivable and long-term receivables, accounts payable, accrued salaries and wages, and certain other accrued liabilities are recorded at amortized cost using the effective interest method. We do not currently have any available for sale financial assets. Comprehensive Income Other comprehensive income includes the unrealized gains and losses on translation of our net investment in self-sustaining foreign operations, and to the extent that cash flow hedges are effective, the change in their fair value, net of income taxes. Other comprehensive income is presented below net income on the Consolidated Statements of Income and Comprehensive Income. Comprehensive income is composed of our net income and other comprehensive income. Accumulated other comprehensive income is a separate component of shareholders' equity, which includes the accumulated balances of all components of other comprehensive income which are recognized in comprehensive income but excluded from net income. Hedges Previously, under Canadian GAAP derivative financial instruments that met hedge accounting criteria were accounted for on an accrual basis, and gains and losses on hedge contracts were accounted for as a component of the related hedged transaction. The new standards require that all derivative instruments, whether designated in hedging relationships or not, be recorded on the balance sheet at fair value. The fair values of derivatives are recorded in other assets or other liabilities. To the extent that cash flow hedges are effective, the change in their fair value is recorded in other comprehensive income. Amounts accumulated in other comprehensive income are reclassified to net income in the period in which the hedged item affects net income. The impact of these accounting policy changes on the consolidated balance sheet as at January 1, 2007 was as follows:
Increase in prepaid expenses and other $ 28
Increase in other assets 17
Increase in future tax assets 14
-------------------------------------------------------------------------
Increase in other accrued liabilities $ 32
Increase in other long-term liabilities 17
Increase in future tax liabilities 13
-------------------------------------------------------------------------
Decrease in accumulated other comprehensive income $ 3
-------------------------------------------------------------------------
Average Foreign Exchange
For the three months For the year
ended December 31, ended December 31,
---------------------------- ----------------------------
2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
1 Canadian
dollar equals
U.S. dollars 1.019 0.877 + 16% 0.936 0.882 + 6%
1 euro equals
U.S. dollars 1.450 1.292 + 12% 1.371 1.257 + 9%
1 British pound
equals U.S.
dollars 2.044 1.920 + 7% 2.001 1.845 + 8%
-------------------------------------------------------------------------
The preceding table reflects the average foreign exchange rates between the most common currencies in which we conduct business and our U.S. dollar reporting currency. The significant changes in these foreign exchange rates for the three months and year ended December 31, 2007 impacted the reported U.S. dollar amounts of our sales, expenses and income. The results of operations whose functional currency is not the U.S. dollar are translated into U.S. dollars using the average exchange rates in the table above for the relevant period. Throughout this MD&A, reference is made to the impact of translation of foreign operations on reported U.S. dollar amounts where relevant. Our results can also be affected by the impact of movements in exchange rates on foreign currency transactions (such as raw material purchases or sales denominated in foreign currencies). However, as a result of hedging programs employed by us, primarily in Canada, foreign currency transactions in the current period have not been fully impacted by the recent movements in exchange rates. We record foreign currency transactions at the hedged rate where applicable. Finally, holding gains and losses on foreign currency denominated monetary items, which were recorded in selling, general and administrative expenses, impact reported results.
RESULTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2007
-------------------------------------------------------------------------
Sales
2007 2006 Change
-------------------------------------------------------------------------
Vehicle Production Volumes
(millions of units)
North America 15.102 15.335 - 2%
Europe 15.938 15.536 + 3%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 859 $ 775 + 11%
Europe $ 435 $ 362 + 20%
-------------------------------------------------------------------------
Sales
External Production
North America $ 12,977 $ 11,883 + 9%
Europe 6,936 5,624 + 23%
Rest of World 411 269 + 53%
Complete Vehicle Assembly 4,008 4,378 - 8%
Tooling, Engineering and Other 1,735 2,026 - 14%
-------------------------------------------------------------------------
Total Sales $ 26,067 $ 24,180 + 8%
-------------------------------------------------------------------------
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External Production Sales - North America
External production sales in North America increased 9% or $1.1 billion to $13.0 billion for 2007 compared to $11.9 billion for 2006. This increase in production sales reflects an 11% 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 overall North American vehicle production volumes declined 2% during 2007 compared to 2006, vehicle production volumes at GM and Ford declined 8% and 7%, respectively. Our average dollar content per vehicle grew by 11% or $84 to $859 for 2007 compared to $775 for 2006, primarily as a result of:
- the launch of new programs during or subsequent to 2006, including:
- the Ford Edge and Lincoln MKX;
- the Saturn Outlook, GMC Acadia and the Buick Enclave;
- GM's full-size pickups;
- the BMW X5;
- the Jeep Wrangler and Wrangler Unlimited;
- the Ford F-Series SuperDuty;
- the Dodge Nitro; and
- the Dodge Avenger and Chrysler Sebring; and
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Ford Fusion, Mercury Milan and Lincoln Zephyr / MKZ;
- the Ford Explorer and Mercury Mountaineer; and
- the Chevrolet HHR;
- programs that ended production during or subsequent to 2006,
including:
- the Ford Freestar and Mercury Monterey;
- the Saturn ION;
- the Buick Rendezvous; and
- the Chrysler Pacifica; and
- incremental customer price concessions.
External Production Sales - Europe
External production sales in Europe increased 23% or $1.3 billion to $6.9 billion for 2007 compared to $5.6 billion for 2006. This increase in production sales reflects a 20% increase in our European average dollar content per vehicle and a 3% increase in European vehicle production volumes. Our average dollar content per vehicle grew by 20% or $73 to $435 for 2007 compared to $362 for 2006, primarily as a result of:
- the launch of new programs during or subsequent to 2006, including:
- the MINI Cooper;
- the Mercedes-Benz C-Class;
- the smart fortwo; and
- the BMW 3-Series;
- an increase in reported U.S. dollar sales primarily due to the
strengthening of the euro and British pound, each against the U.S.
dollar; and
- acquisitions completed during or subsequent to 2006, including the
acquisition of two facilities from Pressac Investments Limited
("Pressac acquisition") in January 2007.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including
- the Mercedes-Benz E-Class; and
- the Volkswagen Golf;
- the sale of certain facilities during or subsequent to 2006; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in the Rest of World increased 53% or $142 million to $411 million for 2007 compared to $269 million for 2006. The increase in production sales is primarily as a result of:
- the launch of new programs during or subsequent to 2006 in Korea,
China, Brazil and South Africa;
- increased production and/or content on certain programs in Korea,
China and Brazil; and
- an increase in reported U.S. dollar sales as a result of the
strengthening of the Brazilian real, Korean Won and Chinese Renminbi,
each against the U.S. dollar.
Complete Vehicle Assembly Sales
The terms of our various vehicle assembly contracts differ with respect to the ownership of components and supplies related to the assembly process and the method of determining the selling price to the OEM customer. Under certain contracts, we are acting as principal, and purchased components and systems in assembled vehicles are included in our inventory and cost of sales. These costs are reflected on a full-cost basis in the selling price of the final assembled vehicle to the OEM customer. Other contracts provide that third party components and systems are held on consignment by us, and the selling price to the OEM customer reflects a value-added assembly fee only. Production levels of the various vehicles assembled by us have an impact on the level of our sales and profitability. In addition, the relative proportion of programs accounted for on a full-cost basis and programs accounted for on a value-added basis also 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, however, because purchased components are included in cost of sales, profitability as a percentage of total sales is reduced. Conversely, a relative increase in the assembly of vehicles accounted for on a value-added basis has the effect of reducing the level of total sales and increasing profitability as a percentage of total sales.
2007 2006 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales $ 4,008 $ 4,378 - 8%
-------------------------------------------------------------------------
Complete Vehicle Assembly Volumes
(Units)
Full-Costed: 131,056 157,963 - 17%
BMW X3, Mercedes E-Class and
G-Class, and Saab 9(3)
Convertible
Value-Added: 68,913 90,096 - 24%
Jeep Grand Cherokee,
Chrysler 300, Chrysler
Voyager, and Jeep Commander
-------------------------------------------------------------------------
199,969 248,059 - 19%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Complete vehicle assembly volumes decreased 19% to 199,969 units for 2007 compared to 248,059 units for 2006. Complete vehicle assembly sales decreased 8% or $370 million to $4.0 billion for 2007 compared to $4.4 billion for 2006. The decrease in complete vehicle assembly sales is primarily the result of:
- the end of production of the Mercedes-Benz E-Class 4MATIC at our Graz
assembly facility in the fourth quarter of 2006, as Mercedes is
assembling this vehicle in-house; and
- a decrease in assembly volumes for the BMW X3, Saab 9(3) Convertible
and all vehicles accounted for on a value-added basis.
These factors were partially offset by:
- an increase in reported U.S. dollar sales due to the strengthening of
the euro against the U.S. dollar; and
- higher assembly volumes for the Mercedes-Benz G-Class.
Tooling, Engineering and Other
Tooling, engineering and other sales decreased 14% or $291 million to $1.74 billion for 2007 compared to $2.03 billion for 2006. In 2007, the major programs for which we recorded tooling, engineering and other sales were:
- GM's full-size pickups;
- the Ford Flex;
- the BMW X3, Z4, 1-Series and 3-Series programs;
- the Dodge Grand Caravan and Chrysler Town & Country;
- the Dodge Journey;
- the Mazda 6;
- the MINI Cooper;
- the smart fortwo;
- the Audi A5;
- the Mercedes C-Class, GL-Class and R-Class; and
- the Ford F-Series SuperDuty.
In 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.
Also in the fourth quarter of 2006, 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 addition, tooling, engineering and other sales benefited from the strengthening of the Canadian dollar, euro and British Pound, each against the U.S. dollar. Gross Margin Gross margin increased $499 million to $3.5 billion for 2007 compared to $3.0 billion for 2006, and gross margin as a percentage of total sales increased to 13.3% for 2007 compared to 12.3% for 2006. The unusual items discussed in the "Unusual Items" section above negatively impacted gross margin as a percentage of total sales in 2007 and 2006 by 0.1% and 0.2%, respectively. Excluding these unusual items, the 0.9% increase in gross margin as a percent of sales was primarily a result of:
- incremental gross margin earned on new programs that launched during
or subsequent to 2006;
- the end of production of the Mercedes-Benz E-Class 4MATIC at our Graz
assembly facility, which had a lower gross margin than our
consolidated average;
- the decrease in complete vehicle assembly sales which had a lower
gross margin than our consolidated average;
- the decrease in tooling and other sales that earn low or no margins;
- incremental gross margin earned as a result of increased production
volumes for certain programs;
- productivity and efficiency improvements at certain facilities,
including underperforming divisions; and
- improvements as a result of prior years' restructuring activities.
The factors contributing to the increase in gross margin as a percentage of sales were partially offset by:
- costs incurred in preparation for upcoming launches or for programs
that have not fully ramped up production;
- operational inefficiencies and other costs at certain facilities, in
particular at certain powertrain and interiors facilities in North
America;
- lower gross margin earned as a result of a decrease in production
volumes for certain programs;
- higher employee profit sharing; and
- incremental customer price concessions.
Depreciation and Amortization
Depreciation and amortization costs increased 10% or $82 million to $872 million for 2007 compared to $790 million for 2006. Excluding the unusual items discussed in the "Unusual Items" section above, depreciation and amortization increased $76 million primarily as a result of:
- an increase in reported U.S. dollar depreciation and amortization due
to the strengthening of the Canadian dollar and euro, each against
the U.S. dollar;
- depreciation and amortization of assets at facilities that launched
programs during or subsequent to 2006;
- accelerated depreciation on certain program specific assets in North
America;
- additional depreciation and amortization of assets related to the
Pressac acquisition in January 2007; and
- an increase in assets employed to support future business.
Selling, General and Administrative ("SG&A")
SG&A expenses as a percentage of total sales remained unchanged in 2007 compared to 2006 at 5.6%. SG&A expenses increased 7% or $101 million to $1.5 billion for 2007 compared to $1.4 billion for 2006. Excluding the unusual items discussed in the "Unusual Items" section above, SG&A expenses increased by $199 million primarily as a result of:
- 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;
- higher employee profit sharing and incentive compensation;
- higher infrastructure costs to support the increase in sales levels,
including spending related to programs that launched during or
subsequent to 2006;
- cash awarded to a former sales agent pursuant to an unfavourable
arbitration award;
- a $12 million write-down of our investments in ABCP as discussed in
the "Cash Resources" section below;
- increased spending as a result of the Pressac acquisition in January
2007;
- cost incurred to develop and grow our business in Russia; and
- increased stock compensation costs related to restricted shares,
including the acceleration of certain restricted share agreements
with a former executive, which resulted in a one-time charge to
compensation expense of approximately $7 million.
These factors were partially offset by:
- the sale or disposition of certain facilities during or subsequent to
2006;
- reduced spending at certain underperforming divisions; and
- the recovery of a long-term receivable that was previously written
off.
Impairment Charges
Impairment charges increased $2 million to $56 million for 2007 compared to $54 million for 2006. For a complete discussion of the impairment charges, see the "Unusual Items" section above and note 4 of the accompanying unaudited interim consolidated financial statements for the three months and year ended December 31, 2007.
Earnings before Interest and Taxes ("EBIT")(1)
2007 2006 Change
-------------------------------------------------------------------------
North America $ 688 $ 575 + 20%
Europe 359 126 + 285%
Rest of World 20 - -
Corporate and Other 23 77 - 70%
-------------------------------------------------------------------------
Total EBIT $ 1,090 $ 778 + 40%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in EBIT for the years ended December 31, 2007 and 2006 were the following unusual items, which have been discussed in the "Unusual Items" section above.
2007 2006
-------------------------------------------------------------------------
North America
Impairment charges $ (44) $ (13)
Restructuring charges (35) (34)
Foreign currency gain 23 -
Sale of facilities - (5)
-------------------------------------------------------------------------
(56) (52)
Europe
Impairment charges (12) (41)
Restructuring charges (4) (43)
Sale of facility (12) (12)
Sale of property 36 -
-------------------------------------------------------------------------
8 (96)
Corporate and other
Foreign currency gain 3 -
-------------------------------------------------------------------------
3 -
-------------------------------------------------------------------------
$ (45) $ (148)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBIT is defined as operating income as presented on our unaudited
interim consolidated financial statements before net interest expense
or income.
North America
EBIT in North America increased 20% or $113 million to $688 million for 2007 compared to $575 million for 2006. Excluding the North American unusual items discussed in the "Unusual Items" section above, the remaining $117 million increase in EBIT is primarily due to:
- incremental margin earned on programs that launched during or
subsequent to 2006;
- productivity and efficiency improvements at certain facilities,
including underperforming divisions;
- an increase in reported U.S. dollar sales, net of increased costs,
due to the currency translation; and
- the sale and/or closure of certain underperforming divisions during
or subsequent to 2006.
The factors contributing to the increase in EBIT were partially offset by:
- operational inefficiencies and other costs at certain underperforming
divisions, in particular at certain powertrain and interiors
facilities;
- lower margins earned as a result of a decline in production volumes
for certain programs;
- costs incurred in preparation for upcoming launches or for programs
that have not fully ramped up production;
- costs incurred to develop and grow our electronics capabilities;
- higher employee profit sharing and incentive compensation;
- higher affiliation fees paid to Corporate; and
- incremental customer price concessions.
Europe
EBIT in Europe increased 185% or $233 million to $359 million for 2007 compared to $126 million for 2006. Excluding the European unusual items discussed in the "Unusual Items" section above, the remaining $129 million increase in EBIT is primarily due to:
- incremental margin earned on programs that launched during or
subsequent to 2006;
- incremental margin earned as a result of higher production volumes
for certain production programs;
- acquisitions completed during or subsequent to 2006;
- productivity and efficiency improvements at certain facilities,
including underperforming divisions;
- the sale and/or closure of certain underperforming divisions during
or subsequent to 2006; and
- an increase in reported U.S. dollar sales, net of increased costs,
due to the currency translation.
These factors were partially offset by:
- lower margins earned as a result of a decrease in vehicle production
volumes for certain programs including the end of production of the
Mercedes-Benz E-Class 4MATIC at our Graz assembly facility in 2006;
- operational inefficiencies and other costs at certain facilities;
- costs incurred to develop and grow our business in Russia;
- cash awarded to a former sales agent pursuant to an unfavourable
arbitration award;
- costs incurred to develop and grow our electronics capabilities;
- higher affiliation fees paid to Corporate;
- higher incentive compensation and employee profit sharing; and
- incremental customer price concessions.
Rest of World
In 2007, we generated $20 million of EBIT in the Rest of World compared to no EBIT for 2006. The increase in EBIT is primarily the result of:
- incremental margin earned on the increase in production sales
discussed above; and
- increased equity income earned on our 41% interest in Shin Young
Metal Ind. Co.
These factors were partially offset by 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 70% or $54 million to $23 million for 2007 compared to $77 million for 2006. Excluding the Corporate and Other unusual items discussed in the "Unusual Items" section above, EBIT decreased $57 million as a result of:
- increased salaries and wages;
- increased incentive compensation, due primarily to an increase in our
consolidated earnings;
- increased consulting fees incurred;
- increased stock compensation costs related to restricted shares,
including the acceleration of certain restricted share agreements
with a former executive, which resulted in a one-time charge to
compensation expense of approximately $7 million;
- the write-down of our investment in ABCP as discussed in the "Cash
Resources" section below; and
- cost incurred to develop and grow our business in Russia;.
These factors were partially offset by:
- an increase in affiliation fees earned from our divisions; and
- the recovery of a long-term receivable that was previously written
off.
Interest Income
During 2007, we earned net interest income of $62 million, compared to $14 million for 2006. The $48 million increase is primarily as a result of:
- an increase in interest income earned, including interest earned on
the net cash received from the Arrangement; and
- a reduction in interest expense due to:
- the repayment in January 2007 of the third series of our senior
unsecured notes related to the acquisition of New Venture Gear
("NVG"); and
- the repayment of long-term debt during 2006, including
$107 million of senior unsecured notes.
Operating Income
Operating income increased 45% or $360 million to $1.2 billion for 2007 compared to $0.8 billion for 2006. Excluding the unusual items, discussed in the "Unusual Items" section above, operating income for 2007 increased 27% or $257 million. The increase in operating income (excluding unusual items) was the result of the increase in EBIT (excluding unusual items) combined with the increase in net interest income earned, both as discussed above. Income Taxes Our effective income tax rate on operating income (excluding equity income) increased to 42.9% for 2007 from 33.9% for 2006. In 2007 and 2006, income tax rates were impacted by the unusual items discussed in the "Unusual Items" section above. Excluding the unusual items, our effective income tax rate decreased to 29.6% for 2007 compared to 31.9% for 2006. The decrease in the effective income tax rate is primarily the result of:
- a decrease in losses not benefited, primarily at certain interiors
facilities in Europe;
- an unfavourable Supreme Court of Canada ruling in 2006 against a
taxpayer which restricts deductibility of certain foreign exchange
losses; and
- a change in mix of earnings, whereby proportionately more income was
earned in jurisdictions with lower income tax rates.
Net Income
Net income increased by 26% or $135 million to $663 million for 2007 compared to $528 million for 2006. Excluding the unusual items, discussed in the "Unusual Items" section above, net income increased $202 million as a result of an increase in operating income partially offset by an increase in income taxes, all as discussed above.
Earnings per Share
2007 2006 Change
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Earnings per Class A Subordinate
Voting or Class B Share
Basic $ 5.95 $ 4.86 + 22%
Diluted $ 5.86 $ 4.78 + 23%
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Average number of Class A
Subordinate Voting and Class B
Shares outstanding
Basic 111.4 108.8 + 2%
Diluted 114.1 111.4 + 2%
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Diluted earnings per share increased 23% or $1.08 to $5.86 for 2007 compared to $4.78 for 2006. Excluding the unusual items, discussed in the "Unusual Items" section above, diluted earnings per share increased $1.65 from 2006 as a result of the increase in net income (excluding unusual items) partially offset by an increase in the weighted average number of diluted shares outstanding during the year. The increase in the weighted average number of diluted shares outstanding was primarily the result of the Class A Subordinate Voting Shares issued in 2007 related to the Arrangement and stock options exercised during 2006 and 2007, partially offset by the repurchase and cancellation of our Class A Subordinate Voting Shares under the terms of our fully completed Substantial Issuer Bid and ongoing Normal Course Issuer Bid. 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 2007 was 16.6%, an increase from 11.9% for 2006. The unusual items discussed in the "Unusual Items" section above negatively impacted 2007 ROFE by 0.6% and 2006 ROFE by 2.1%. Excluding these unusual items, the 3.2% increase in ROFE can be attributed to an increase in EBIT (excluding unusual items), as discussed above, partially offset by an approximate $60 million increase in average funds employed for 2007 compared to 2006. The increase in our average funds employed was primarily as a result of:
- acquisitions completed during or subsequent to 2006 including:
- Pressac in January 2007, which added approximately $59 million of
average funds employed; and
- CTS in February 2006, which added approximately $60 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 2006; and
- a reduction in our average investment in working capital.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
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Cash Flow from Operations
2007 2006 Change
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Net income $ 663 $ 528
Items not involving current cash
flows 1,024 911
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1,687 1,439 $ 248
Changes in non-cash operating assets
and liabilities (94) 157
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Cash provided from operating
activities $ 1,593 $ 1,596 $ (3)
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(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 increased $248 million to $1.7 billion for 2007 compared to $1.4 billion for 2006. The increase in cash flow from operations was due to the $135 million increase in net income (as discussed above) and a $113 million increase in items not involving current cash flows is comprised of the following:
2007 2006
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Depreciation and amortization $ 872 $ 790
Goodwill and long-lived asset impairments 56 54
Valuation allowance established against future
tax assets 115 -
Equity Income (11) (13)
Future Income taxes and non-cash portion of
current taxes (123) (92)
Other non-cash charges 115 172
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Items not involving current cash flows $ 1,024 $ 911
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The $31 million change in future income taxes and non-cash portion of current taxes is due to a decrease in net tax losses not benefited partially offset by the $53 million charge to future income tax expense as a result of an alternative minimum tax introduced in Mexico. The $57 million decrease in other non-cash charges was due to:
- a $41 million increase on gains on disposal of fixed assets,
including the following items as discussed in the "Unusual Items"
section above:
- the $36 million gain on sale of property in the United Kingdom;
- the $12 million loss on sale of facility during 2007; and
- the $17 million loss on the disposal of facilities during 2006;
- a $30 million decrease in other asset amortization; and
- a $23 million decrease in the loss incurred on the write-off and/or
disposal of assets, related primarily to restructuring activities.
These factors were partially offset by:
- a $21 million increase in dividends received from equity accounted
investments; and
- a $12 million write-down of a portion of our investments in ABCP as
discussed in the "Cash Resources" section below.
Cash invested in non-cash operating assets and liabilities amounted to $94 million for 2007 compared to cash generated of $157 million for 2006. The change in non-cash operating assets and liabilities is comprised of the following sources (and uses) of cash:
2007 2006
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Accounts receivable $ 36 $ 14
Inventory (97) 60
Prepaid expenses and other (13) 15
Accounts payable and other accrued liabilities (65) 62
Income taxes payable 66 35
Deferred revenues (21) (29)
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Changes in non-cash operating assets and
liabilities $ (94) $ 157
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During 2007 and 2006 the changes in non-cash operating assets and liabilities were not significant.
Capital and Investment Spending
2007 2006 Change
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Fixed assets $ (741) $ (793)
Investments and other assets (190) (99)
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Fixed assets, investments and other
assets additions (931) (892)
Purchases of subsidiaries (46) (284)
Proceeds from disposals 109 65
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Cash used in investing activities $ (868) $ (1,111) $ 243
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Fixed assets, investments and other assets additions
In 2007 we invested $741 million in fixed assets, including $29 million related to an agreement we entered into for the purchase of real estate from Magna Entertainment Corp. ("MEC") as discussed in the "Related Parties" section below. 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 2007 was for manufacturing equipment for programs that launched during 2007, or will be launching subsequent to 2007, including equipment for the following major programs:
- Ford F-Series;
- the Ford Flex and Lincoln MKS;
- the Jeep Liberty; and
- the Chrysler 300/300C and Dodge Magnum.
In 2006 we invested $793 million in fixed assets, including capital 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 2007, we invested $190 million in investments and other assets primarily relating to:
- a $130 million investment in ABCP as discussed in the "Cash
Resources" section below;
- fully reimbursable planning, engineering and tooling costs relating
to programs that launched during 2007 or will be launching during
2008; and
- long-term tooling receivables.
In 2006, we invested $99 million in investments and other assets primarily relating 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 2007; and
- long-term tooling receivables.
Purchase of subsidiaries
During 2007, we acquired two facilities from Pressac for total consideration of $52 million, consisting of $46 million paid in cash, net of cash acquired, and $6 million of assumed debt. During 2006, we invested $284 million to purchase subsidiaries, including:
- the acquisition of CTS for total consideration of $271 million,
consisting of $203 million paid in cash and $68 million of assumed
debt;
- the acquisitions from MEC of the Magna Golf Course located in Aurora,
Ontario and the Fontana Golf and Sports Club located in Austria total
consideration of $84 million, consisting of $63 million paid in cash
and $21 million of assumed debt; and
- a number of small acquisitions, including manufacturing facilities
and engineering centres, the cash portion of which amounted to
$18 million.
Proceeds from disposition
For 2007, proceeds from disposition were $109 million, which included:
- proceeds received from the sale of property in the United Kingdom, as
discussed in the "Unusual Items" section above; and
- proceeds from normal course fixed and other asset disposals.
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.
Financing
2007 2006 Change
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Repayments of debt $ (79) $ (275)
Issues of debt 28 24
Issues of Class A Subordinate
Voting Shares 1,560 28
Repurchase of Class A Subordinate
Voting Shares (1,310) -
Repurchase of Class B Shares (24) -
Cash dividends paid (131) (163)
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Cash provided from (used in)
financing activities $ 44 $ (386) $ 430
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Magna International Inc.
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