The repayments of debt in 2007 included the repayment in January of the third series of senior unsecured zero-coupon notes issued in connection with the NVG acquisition. The repayments of debt in 2006 included the repayments of:
- the second series of senior unsecured zero-coupon notes issued in
connection with the NVG acquisition; and
- senior unsecured notes of $107 million.
During the third quarter of 2007, we issued 20.0 million of our Class A Subordinate Voting Shares for cash proceeds of $1.531 billion (net of issue costs of $6 million) in connection with the Arrangement. We also purchased for cancellation 11.9 million or our Class A Subordinate Voting Shares for an aggregate purchase price of $1.091 billion (including transaction costs of $2 million) and 217,400 of our Class B Shares for an aggregate purchase price of $24 million. Each of these transactions is discussed in more detail in the "Capital Transactions" section above. During the fourth quarter of 2007, we repurchased 2.7 million Class A Subordinate Voting Shares for an aggregate purchase price of $219 million in relation to the NCIB as discussed above. During 2007, we received cash proceeds of $29 million on the exercise of stock options for Class A Subordinate Voting Shares compared to $28 million for 2006. Cash dividends paid per Class A Subordinate Voting or Class B Share were $1.15 for 2007 compared to $1.52 for 2006 and total cash dividends paid decreased to $131 million for 2007 compared to $163 million for 2006.
Financing Resources
2007 2006 Change
-------------------------------------------------------------------------
Liabilities
Bank indebtedness $ 89 $ 63
Long-term debt due within one year 374 98
Long-term debt 337 605
-------------------------------------------------------------------------
800 766 $ 34
Shareholders' equity 8,642 7,157 1,485
-------------------------------------------------------------------------
Total capitalization $ 9,442 $ 7,923 $ 1,519
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total capitalization increased by 19% or $1,519 million to $9.4 billion at December 31, 2007 as compared to $7.9 billion at December 31, 2006. The increase in capitalization is a result of a $1.5 billion increase in shareholders' equity and a $34 million increase in liabilities. The increase in liabilities is primarily the result of an increase in bank indebtedness to satisfy working capital requirements in certain regions and the strengthening of the Canadian dollar and euro, each against the U.S. dollar. This increase in bank indebtedness was partially offset by decreases in long-term debt as a result of the repayment of the third series of our senior unsecured notes related to the NVG acquisition. The increase in shareholders' equity is primarily the result of:
- Class A Subordinate Voting Shares issued in connection with the
Arrangement and on the exercise of stock options and stock
appreciation rights;
- net income earned during 2007 (as discussed above); and
- a $727 million increase in accumulated net unrealized gains on
translation of net investment in foreign operations, primarily as a
result of the strengthening of the Canadian dollar, euro and
British pound, between December 31, 2006 and December 31, 2007, each
against the U.S. dollar.
These factors were partially offset by:
- the repurchase for cancellation of Class A Subordinate Voting Shares
in connection with the SIB and NCIB;
- the repurchase for cancellation of Class B Shares in connection with
the Arrangement;
- dividends paid during 2007; and
- the reduction in the stated value of our Class A Subordinate Voting
Shares as a result of the repurchase of Class A Subordinate Voting
Shares which:
- have been awarded on a restricted basis to certain executives; and
- are being held in Trust for purposes of our restricted stock unit,
deferred profit sharing and similar programs.
Cash Resources
During 2007, our cash resources increased by $1.1 billion to $2.954 billion as a result of the cash provided from operating activities and financing activities, partially offset by the cash used in investing activities. In addition to our cash resources, we had term and operating lines of credit totalling $2.1 billion, of which $1.8 billion was unused and available. In July 2007, our five-year revolving term facility was extended for one additional year, expiring on July 31, 2012. At December 31, 2007 we held investments in ABCP with a face value of Cdn $134 million. When acquired, these investments were rated R1 (High) by Dominion Bond Rating Service ("DBRS"), the highest credit rating issued for commercial paper, and backed by AAA rated assets, and liquidity agreements. These investments matured during the third quarter of 2007 but, as a result of liquidity issues in the ABCP market, did not settle on maturity. As a result, we have reclassified our ABCP as long-term investments after initially classifying them as cash and cash equivalents. In addition, we recorded a $12 million impairment of the value of this investment as follows:
- a charge against potentially non-performing assets (primarily sub-
prime residential mortgages), which was determined on a probability
weighted basis;
- a charge related to restructured notes which are expected to continue
performing. The return on these notes is expected to be below current
market rates for instruments of comparable credit quality, term and
structure, and accordingly, an impairment charge was recorded using a
discounted cash flow analysis; and,
- costs expected to be incurred by the noteholders related to the
restructuring.
Continuing uncertainties regarding the value of the assets that underlie the ABCP, the amount and timing of cash flows associated with the ABCP and the outcome of the restructuring process could give rise to a change in the value of our investment in ABCP, which would impact our earnings. 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 25, 2007 were exercised or converted:
Class A Subordinate Voting and Class B Shares 116,072,243
Subordinated Debentures(i) 1,096,589
Stock options(ii) 2,945,973
-------------------------------------------------------------------------
120,114,805
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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, 2007, we had contractual obligations requiring annual payments as follows:
2009- 2011- There-
2008 2010 2012 after Total
-------------------------------------------------------------------------
Operating leases with:
MI Developments Inc.
("MID") $ 164 $ 322 $ 321 $ 699 $ 1,506
Third parties 146 226 158 192 722
Long-term debt 374 284 18 35 711
-------------------------------------------------------------------------
Total contractual
obligations $ 684 $ 832 $ 497 $ 926 $ 2,939
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 $316 million at December 31, 2007. These obligations are as follows:
Termination
and
Pension Retirement Long Service
Liability Liability Arrangements Total
-------------------------------------------------------------------------
Projected benefit
obligation $ 301 $ 79 $ 215 $ 595
Less plan assets (279) - - (279)
-------------------------------------------------------------------------
Unfunded amount 22 79 215 316
Unrecognized past
service costs and
actuarial gains
(losses) 11 7 (19) (1)
-------------------------------------------------------------------------
Amount recognized in
other long-term
liabilities $ 33 $ 86 $ 196 $ 315
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 2007 for facilities leased from MID and third parties were $159 million and $92 million, respectively. Operating lease commitments in 2008 for facilities leased from MID and third parties are expected to be $164 million and $93 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 $65 million for 2007, and are expected to be $53 million in 2008. 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 $37 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. Frank Stronach and Ms. Belinda Stronach, our Chairman and Executive Vice-Chairman, respectively, and two members of the Stronach family are trustees and members of the class of potential beneficiaries of the Stronach Trust. The Stronach Trust indirectly holds shares which represent a 53% voting interest in M Unicar Inc., which controls Magna through the right to direct the votes attaching to 100% of our Class B Shares and approximately 18% of our Class A Subordinate Voting Shares. The Stronach Trust 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, 2007 and 2006 was $159 million and $153 million, respectively. Included in accounts payable are trade amounts owing to MID and its subsidiaries in the amount of $1 million. During the fourth quarter of 2007, we entered into an agreement to purchase 225 acres of real estate located in Austria from MEC for $29 million ((euro)20 million). The closing of the transaction is expected to occur during the first quarter of 2008 following the satisfaction of customary closing conditions including obtaining all necessary regulatory approvals. 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 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 statement of income with respect to these agreements for the year ended December 31, 2006 was $6 million. 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, 2007 and 2006 was $40 million and $27 million, respectively. During the year ended December 31, 2007, trusts, which exist to make orderly purchases of our shares for employees either for transfer to the Employee Equity and Profit Participation Program or to recipients of either bonuses or rights to purchase such shares from the trusts, borrowed up to $56 million from us to facilitate the purchase of our Class A Subordinate Voting Shares. At December 31, 2007, the trusts' indebtedness to us was $23 million. During the year ended December 31, 2007, we entered into agreements to provide planning, management and engineering services to companies under Basic Element's control. Sales to affiliates of Basic Element are typically under normal commercial terms. Sales included in the consolidated statements of income for the year ended December 31, 2007 with respect to affiliates of Basic Element were $7 million. Included in accounts receivable as at December 31, 2007 are trade amounts owing to Magna in the amount of $6 million. We also formed a joint supply organization with a subsidiary of Basic Element. Our consolidated financial statements include our proportionate share of the combined revenues, expenses, assets, liabilities and cash flows of the jointly controlled entity. SUBSEQUENT EVENTS ------------------------------------------------------------------------- On February 22, 2008, the United Auto Workers' Union announced the ratification of a four-year wage and benefit contract (expiring in September 2011) at a powertrain facility in Syracuse, New York. Under the terms of the agreement, we will make a number of lump-sum payments to each eligible employee totalling $87,500 to offset future wage and benefit reductions. These lump-sum payments will be paid in four annual instalments beginning April 1, 2008.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED DECEMBER 31, 2007
-------------------------------------------------------------------------
Sales
For the three months
ended December 31,
-------------------------------------
2007 2006 Change
-------------------------------------------------------------------------
Vehicle Production Volumes
(millions of units)
North America 3.658 3.608 + 1%
Europe 3.936 3.970 - 1%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 906 $ 800 + 13%
Europe $ 478 $ 378 + 26%
-------------------------------------------------------------------------
Sales
External Production
North America $ 3,314 $ 2,887 + 15%
Europe 1,881 1,499 + 25%
Rest of World 124 79 + 57%
Complete Vehicle Assembly 981 1,246 - 21%
Tooling, Engineering and Other 536 657 - 18%
-------------------------------------------------------------------------
Total Sales $ 6,836 $ 6,368 + 7%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total sales increased 7% or $468 million to $6.8 billion for the fourth quarter of 2007 compared to $6.4 billion for the fourth quarter of 2006. External Production Sales - North America External production sales in North America increased 15% or $427 million to $3.3 billion for the fourth quarter of 2007 compared to $2.9 billion for the fourth quarter of 2006. This increase in production sales reflects a 13% increase in our North American average dollar content per vehicle combined with a 1% increase in North American vehicle production volumes. Production volumes at certain of our largest North American customers continue to deteriorate. While North American vehicle production volumes increased 1% during the fourth quarter of 2007 compared to the fourth quarter of 2006, production volumes at GM and Chrysler declined 6% and 3%, respectively. Our average dollar content per vehicle grew by 13% or $106 to $906 for the fourth quarter of 2007 compared to $800 for the fourth quarter of 2006, primarily due to:
- the launch of new programs during or subsequent to the fourth quarter
of 2006, including:
- the Saturn Outlook, GMC Acadia and Buick Enclave;
- the Ford Edge and Lincoln MKX;
- the Dodge Grand Caravan and Chrysler Town & Country;
- the BMW X5;
- GM's full-size pickups;
- the Ford F-Series SuperDuty;
- the Jeep Liberty; and
- the Ford Escape and Mazda Tribute;
- 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 300/300C, Dodge Charger and Magnum; and
- the Jeep Wrangler and Wrangler Unlimited.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Dodge Nitro;
- the Ford Fusion, Mercury Milan and Lincoln Zephyr/MKZ;
- the Chevrolet Impala;
- GM's full-size SUVs;
- the Dodge Ram Pickup; and
- the Chevrolet Equinox, Pontiac Torrent and Suzuki XL7;
- programs that ended production during or subsequent to the fourth
quarter of 2006, including:
- 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 25% or $382 million to $1.88 billion for the fourth quarter of 2007 compared to $1.50 billion for the fourth quarter of 2006. This increase in production sales reflects a 26% increase in our European average dollar content per vehicle partially offset by a 1% decline in European vehicle production volumes. Our average dollar content per vehicle grew by 26% or $100 to $478 for the fourth quarter of 2007 compared to $378 for the fourth quarter of 2006, 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 2006, including:
- the Mercedes C-Class;
- the smart fortwo;
- the MINI Clubman; and
- the Volkswagen Tiguan;
- increased production and/or content on certain programs, including:
- the MINI Cooper;
- the BMW 3-Series;
- the Volkswagen Caddy; and
- the Opel Astra; and
- the Pressac acquisition in 2007.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Mercedes E-Class;
- the BMW X3; and
- the Jaguar XJ-Series;
- incremental customer price concessions; and
- the sale of certain facilities during or subsequent to the fourth
quarter of 2006.
External Production Sales - Rest of World
External production sales in the Rest of World increased 57% or $45
million to $124 million for the fourth quarter of 2007 compared to $79 million
for the fourth quarter of 2006. The increase in production sales is a result
of:
- the launch of new programs during or subsequent to the fourth quarter
of 2006 in Korea, China, Brazil and South Africa;
- increased production and/or content on certain programs in Korea,
China and Brazil;
- 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
For the three months
ended December 31,
-------------------------------------
2007 2006 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales $ 981 1,246 - 21%
-------------------------------------------------------------------------
Complete Vehicle Assembly
Volumes (Units)
Full-Costed: 28,841 43,187 - 33%
BMW X3, Mercedes E-Class and
G-Class, and Saab 9(3)
Convertible
Value-Added: 13,052 21,919 - 40%
Jeep Grand Cherokee,
Chrysler 300, Chrysler Voyager,
and Jeep Commander
-------------------------------------------------------------------------
41,893 65,106 - 36%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Complete vehicle assembly sales decreased 21% or $265 million 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% or 23,213 units. The decrease in complete vehicle assembly sales was primarily as a 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, the Mercedes-Benz
G-Class 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 Saab 9(3) Convertible.
Tooling, Engineering and Other
Tooling, engineering and other sales decreased 18% or $121 million to $536 million for the fourth quarter of 2007 compared to $657 million for the fourth quarter of 2006. In the fourth quarter of 2007 the major programs for which we recorded tooling, engineering and other sales were:
- the BMW Z4 and 1-Series;
- GM's full-size pickups;
- the Dodge Grand Caravan and Chrysler Town & Country;
- the Dodge Journey and Nitro programs;
- the smart fortwo;
- the Mercedes C-Class;
- the Jeep Liberty; and
- the Ford F-Series SuperDuty.
In 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;
- the Dodge Journey;
- the Dodge Caliber; and
- the Mercedes C-Class.
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 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,
-------------------------------------
2007 2006 Change
-------------------------------------------------------------------------
North America $ 115 $ 40
Europe 59 (35)
Rest of World 8 4
Corporate and Other - 27
-------------------------------------------------------------------------
Total EBIT $ 182 $ 36 + 406%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in EBIT for the fourth quarters of 2007 and 2006 were the
following unusual items, which are described above in the "Unusual Items"
section.
For the three months
ended December 31,
------------------------
2007 2006
-------------------------------------------------------------------------
North America
Impairment charges $ (22) $ (13)
Restructuring charges (17) (7)
Foreign currency gain 23 -
-------------------------------------------------------------------------
(16) (20)
Europe
Impairment charges $ (12) $ (41)
Restructuring charges - (30)
-------------------------------------------------------------------------
(12) (71)
Corporate and other
Foreign currency loss (4) -
-------------------------------------------------------------------------
$ (32) $ (91)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America
EBIT in North America increased 188% or $75 million to $115 million for the fourth quarter of 2007 compared to $40 million for the fourth quarter of 2006. Excluding the North American unusual items discussed in the "Unusual Items" section above, EBIT increased $71 million primarily due to:
- incremental margin earned on new programs that launched during or
subsequent to the fourth quarter of 2006;
- incremental margin earned as a result of increased production volumes
for certain programs;
- productivity and efficiency improvements at certain facilities,
including underperforming divisions;
- improvements as a result of prior years' restructuring activities;
and
- an increase in reported U.S. dollar sales, net of increased costs,
due to the currency translation.
These factors 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 decrease in production volumes
for certain programs;
- costs incurred in preparation for upcoming launches or for programs
that have not fully ramped up production;
- higher incentive compensation;
- higher affiliation fees paid to Corporate; and
- incremental customer price concessions.
Europe
EBIT in Europe increased $94 million to $59 million for the fourth quarter of 2007 compared to a loss of $35 million for the fourth quarter of 2006. Excluding the European unusual items discussed in the "Unusual Items" section above, EBIT increased by $35 million, primarily due to:
- incremental margin earned on new programs that launched during or
subsequent to the fourth quarter of 2006;
- productivity and efficiency improvements at certain facilities,
including underperforming divisions;
- incremental margin earned as a result of increased production volumes
for certain programs; and
- the sale and/or closure of certain underperforming divisions during
or subsequent to 2006.
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 the
fourth quarter of 2006;
- operational inefficiencies and other costs at certain facilities;
- cash awarded to a former sales agent pursuant to an unfavourable
arbitration award;
- costs incurred to develop and grow our electronics capabilities;
- higher employee profit sharing;
- higher affiliation fees paid to Corporate; and
- incremental customer price concessions.
Rest of World
EBIT in the Rest of World increased $4 million to $8 million for the fourth quarter of 2007 compared to $4 million for the fourth quarter of 2006. The increase in EBIT is primarily the result of the incremental margin earned on the increased production sales as discussed above and productivity and efficiency improvements at certain facilities. 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 In the fourth quarter of 2007 no EBIT was generated in Corporate and other compared to $27 million for the fourth quarter of 2006. Excluding the Corporate and Other unusual items discussed in the "Unusual Items" section above, EBIT decreased $23 million primarily as a result of:
- increased salaries, wages and incentive compensation;
- additional costs related to expanding our business in Russia;
- increased consulting fees;
- higher stock compensation; and
- the $5 million write-down of our investments in ABCP as discussed in
the "Cash Resources" section above.
These factors were partially offset by increased affiliation fees received from our divisions. 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 with respect to interim financial information. 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 # 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, substantially all such tooling contracts are accounted for as separate revenue elements. However, because of the unique contracts related to multiple element arrangements involving engineering and subsequent assembly or production activities, all significant arrangements are 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 are deferred and amortized on a gross basis over the subsequent assembly or production program. Revenues from significant engineering services and tooling contracts that qualify as separate revenue elements are 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 instalments 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 based 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 us, the customer and, in some cases a supplier. Future Income Tax Assets At December 31, 2007 we had recorded future tax assets (net of related valuation allowances) in respect of loss carryforwards and other deductible temporary differences of $108 million and $172 million, respectively. The future tax assets in respect of loss carryforwards relate primarily to U.S. subsidiaries. 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. We have, and we continue to use tax planning strategies to realize future tax assets in order to avoid the potential loss of benefits. 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 factor we use 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. During 2007, we determined that valuation allowances were required in the United States based on:
(i) three year historical cumulative losses at our interior systems
and powertrain operations;
(ii) the deterioration of near-term automotive market conditions in the
United States; and
(iii) 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.
At December 31, 2007, we had gross income tax loss carryforwards of approximately $1,040 million, which relate primarily to operations in the United States, 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, $509 million expire between 2008 and 2027 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, 2007, we had unrecognized past service costs and actuarial experience losses of $1 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 2006 audited consolidated financial statements, which describes these claims. On October 26, 2007, we received a favourable award in a previously disclosed arbitration proceeding involving a steel supplier.
CONTROLS AND PROCEDURES
-------------------------------------------------------------------------
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred during 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 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 interim consolidated financial statements for the year ended December 31, 2007 and our audited consolidated financial statements for the year ended December 31, 2006 and December 31, 2005 as contained in our 2006 Annual Report, each prepared in accordance with Canadian GAAP.
2007 2006 2005
-------------------------------------------------------------------------
Income Statement Data
Vehicle Production Volumes
(millions of units)
North America 15.102 15.335 15.722
Europe 15.938 15.536 15.959
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 859 $ 775 $ 731
Europe $ 435 $ 362 $ 317
-------------------------------------------------------------------------
Sales
External Production
North America $ 12,977 $ 11,883 $ 11,499
Europe 6,936 5,624 5,058
Rest of World 411 269 171
Complete Vehicle Assembly 4,008 4,378 4,110
Tooling, Engineering and Other 1,735 2,026 1,973
-------------------------------------------------------------------------
Total Sales $ 26,067 $ 24,180 $ 22,811
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income $ 663 $ 528 $ 639
Earnings per Class A Subordinate
Voting or Class B Share
Basic $ 5.95 $ 4.86 $ 5.99
Diluted $ 5.86 $ 4.78 $ 5.90
Cash dividends paid per Class A
Subordinate Voting or Class B
Share $ 1.15 $ 1.52 $ 1.52
-------------------------------------------------------------------------
Financial Position Data
Cash and cash equivalents $ 2,954 $ 1,885 $ 1,682
Working Capital $ 3,112 $ 2,277 $ 2,215
Total assets $ 15,343 $ 13,154 $ 12,321
Financing Resources
Liabilities
Bank indebtedness $ 89 $ 63 $ 89
Long-term debt due within
one year 374 98 131
Long-term debt 337 605 700
-------------------------------------------------------------------------
800 766 $ 920
Shareholders' equity 8,642 7,157 6,565
-------------------------------------------------------------------------
Total capitalization $ 9,442 $ 7,923 $ 7,485
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Changes from 2006 to 2007 are explained in "Results of Operations - For the Year Ended December 31, 2007" section above.
2006 COMPARED TO 2005
SALES
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. 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 the year ended
December 31, 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; and
- 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 content
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 the year ended
December 31, 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.
The 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; 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 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. 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 "Unusual Items" 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.
2006 2005 Change
-------------------------------------------------------------------------
Impairment charges(1) $ (46) $ (98)
Restructuring charges(2) (65) (48)
Sale of facilities(3) (15) 10
Future tax recovery 10 -
Charges associated with MG Rover(4) - (13)
Settlement gain(5) - 16
Foreign currency gain(6) - 18
-------------------------------------------------------------------------
$ (116) $ (115) $ (1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The unusual items for 2006 have been discussed in the "Unusual Items" section above. During 2005, the unusual items were as follows:
(1) impairment charges including:
- asset impairments charges relating to certain exterior systems
facilities in the United Kingdom, Belgium, Germany and Canada,
a closure systems facility in the Czech Republic, and certain
powertrain facilities in the United States; and
- a goodwill impairment charge related to our exterior systems
reporting unit in Europe;
(2) restructuring charges in Europe related primarily to severance costs
at a mirrors facility in Ireland, an exterior systems facility in
Belgium, and an engineering centre in France, and restructuring
charges in North America 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;
(3) a gain on sale of a non-core seat component facility in North
America.
(4) MG Rover Group Limited ("MG Rover") was placed into administration,
which is similar to Chapter 11 bankruptcy protection in the United
States. As a result, we recorded charges related to our MG Rover
assets and supplier obligations;
(5) receipt of an award 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
(6) a foreign currency gain on the repatriation of funds from Europe.
Excluding the unusual items, net income decreased $110 million as a result of increases in SG&A spending and depreciation and amortization of $114 million and $79 million, respectively. These factors were partially offset by increases in gross margin, net interest income, and equity income of $21 million, $20 million, and $5 million, respectively, and a decrease in income taxes of $25 million and minority interest expense of $12 million. Gross margin as a percentage of total sales decreased to 12.3% for 2006 compared to 13.1% for 2005. Excluding the unusual items discussed above, gross margin as a percentage of total sales for 2006 decreased 0.6% primarily as 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.
The increase in depreciation and amortization costs for 2006 was primarily as a result of:
- the purchase of subsidiaries, including depreciation and amortization
of assets related to the CTS acquisition in 2006 and the amortization
of fair value increments related to the privatization of our former
public subsidiaries: Tesma International Inc.; Decoma International
Inc.; and Intier Automotive Inc. (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.
SG&A expenses as a percentage of sales increased to 5.6% for 2006 compared to 5.3% for 2005. Excluding unusual items discussed above, SG&A increased $114 million primarily as a result of:
- increased selling, general and administrative expenses related to the
acquisition of CTS;
- 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.
Minority interest expense decreased by $11 million because no minority interest expense was recorded in 2006 as a result of the Privatizations. Earnings per Share 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 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.
Financial Position
-------------------------------------------------------------------------
Total assets
During 2006, total assets increased by $833 million to $13.2 billion primarily as a result of:
- acquisitions during 2006, including the purchase of CTS, which added
approximately $475 million of total assets;
- 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, euro and British pound,
each against the U.S. dollar.
Financing Resources
Total capitalization increased by 6% or $438 million to $7.9 billion at December 31, 2006 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. Cash resources 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. 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,
2007 2007 2007 2007
-------------------------------------------------------------------------
Sales $ 6,423 $ 6,731 $ 6,077 $ 6,836
Net income $ 218 $ 262 $ 155 $ 28
Earnings per Class A Subordinate
Voting or Class B Share
Basic $ 2.00 $ 2.40 $ 1.40 $ 0.24
Diluted $ 1.96 $ 2.35 $ 1.38 $ 0.24
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
In general, sales increased from 2006 to 2007 as a result of product launches, the acquisition of Pressac in January 2007, and the strengthening of the Canadian dollar, euro and British pound, each 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 above:
For the three month periods ended
------------------------------------------
Mar 31, Jun 30, Sep 30, Dec 31,
2007 2007 2007 2007
-------------------------------------------------------------------------
Impairment charges $ - $ (14) $ - $ (26)
Restructuring charges - (10) (5) (12)
Sale of facilities - - (7) -
Sale of property - - 30 -
Foreign currency gain - - 7 17
Write-off deferred tax assets - - - (115)
Future tax (charge) recovery - - (40) (8)
-------------------------------------------------------------------------
$ - $ (24) $ (15) $ (144)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 (charge) recovery - 10 - -
-------------------------------------------------------------------------
$ (9) $ (23) $ (4) $ (80)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For more information regarding our quarter over quarter results, please refer to our first, second and third quarter 2007 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, 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.
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(U.S. dollars in millions, except per share figures)
Three months ended Year ended
December 31, December 31,
-------------------- --------------------
Note 2007 2006 2007 2006
-------------------------------------------------------------------------
Sales $ 6,836 $ 6,368 $ 26,067 $ 24,180
-------------------------------------------------------------------------
Cost of goods sold 5,981 5,701 22,599 21,211
Depreciation and
amortization 239 210 872 790
Selling, general and
administrative 12 403 370 1,461 1,360
Interest income, net (21) (6) (62) (14)
Equity income (3) (3) (11) (13)
Impairment charges 4 34 54 56 54
-------------------------------------------------------------------------
Income from operations
before income taxes 203 42 1,152 792
Income taxes 175 13 489 264
-------------------------------------------------------------------------
Net income 28 29 663 528
Other comprehensive
income: 2,11
Net realized and
unrealized gains
(losses) on
translation of net
investment in
foreign operations 119 (23) 727 193
Repurchase of shares 3,9 (25) - (181) -
Net unrealized losses
on cash flow hedges (2) - (8) -
Reclassifications of
net (gains) losses
on cash flow hedges
to net income (2) - 1 -
-------------------------------------------------------------------------
Comprehensive income $ 118 $ 6 $ 1,202 $ 721
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per Class A
Subordinate Voting or
Class B Share:
Basic $ 0.24 $ 0.26 $ 5.95 $ 4.86
Diluted $ 0.24 $ 0.26 $ 5.86 $ 4.78
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash dividends paid per
Class A Subordinate
Voting or Class B Share $ 0.36 $ 0.38 $ 1.15 $ 1.52
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A
Subordinate Voting and
Class B Shares
outstanding during the
period (in millions):
Basic 117.1 108.8 111.4 108.6
Diluted 118.4 110.5 114.1 111.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
(U.S. dollars in millions)
Three months ended Year ended
December 31, December 31,
-------------------- --------------------
Note 2007 2006 2007 2006
-------------------------------------------------------------------------
Retained earnings,
beginning of period $ 3,640 $ 3,784 $ 3,773 $ 3,409
Net income 28 29 663 528
Dividends on Class A
Subordinate Voting
and Class B Shares (42) (40) (131) (164)
Repurchase of Class A
Subordinate Voting
Shares 3,9 (100) - (755) -
Repurchase of
Class B Shares 3 - - (24) -
-------------------------------------------------------------------------
Retained earnings,
end of period $ 3,526 $ 3,773 $ 3,526 $ 3,773
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 2007 2006 2007 2006
-------------------------------------------------------------------------
Cash provided from
(used for):
OPERATING ACTIVITIES
Net income $ 28 $ 29 $ 663 $ 528
Items not involving
current cash flows 401 295 1,024 911
-------------------------------------------------------------------------
429 324 1,687 1,439
Changes in non-cash
operating assets
and liabilities 400 474 (94) 157
-------------------------------------------------------------------------
829 798 1,593 1,596
-------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Fixed asset additions (305) (249) (741) (793)
Purchase of subsidiaries 6 - (30) (46) (284)
Increase in investments
and other assets 5 (15) (41) (190) (99)
Proceeds from disposition 6 26 109 65
-------------------------------------------------------------------------
(314) (294) (868) (1,111)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayments of debt (18) (249) (79) (275)
Issues of debt 1 - 28 24
Issues of Class A
Subordinate Voting
Shares 3,9 - 12 1,560 28
Repurchase of Class A
Subordinate Voting
Shares 3,9 (219) - (1,310) -
Repurchase of Class B
Shares 3,9 - - (24) -
Dividends (42) (40) (131) (163)
-------------------------------------------------------------------------
(278) (277) 44 (386)
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash and
cash equivalents 65 9 300 104
-------------------------------------------------------------------------
Net increase in cash
and cash equivalents
during the period 302 236 1,069 203
Cash and cash equivalents,
beginning of period 2,652 1,649 1,885 1,682
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Cash and cash equivalents,
end of period $ 2,954 $ 1,885 $ 2,954 $ 1,885
-------------------------------------------------------------------------
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See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars in millions)
December 31, December 31,
Note 2007 2006
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ASSETS
Current assets
Cash and cash equivalents $ 2,954 $ 1,885
Accounts receivable 3,981 3,629
Inventories 1,681 1,437
Prepaid expenses and other 2 154 109
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8,770 7,060
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Investments 5 280 151
Fixed assets, net 4 4,307 4,114
Goodwill 6 1,237 1,096
Future tax assets 2 280255
Other assets 2 469 478
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$ 15,343 $ 13,154
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness $ 89 $ 63
Accounts payable 3,492 3,608
Accrued salaries and wages 544 453
Other accrued liabilities 2,7 911 426
Income taxes payable 248 135
Long term debt due within one year 374 98
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5,658 4,783
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Deferred revenue 60 73
Long term debt 337 605
Other long term liabilities 2 394 288
Future tax liabilities 2 252 248
-------------------------------------------------------------------------
6,701 5,997
-------------------------------------------------------------------------
Shareholders' equity
Capital stock 3,9
Class A Subordinate Voting Shares
(issued: 115,344,184; December 31,
2006 - 108,787,387) 3,708 2,505
Class B Shares
(convertible into Class A
Subordinate Voting Shares)
(issued: 726,829; December 31,
2006 - 1,092,933) - -
Contributed surplus 10 58 65
Retained earnings 3 3,526 3,773
Accumulated other comprehensive
income 2,3,11 1,350 814
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8,642 7,157
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$ 15,343 $ 13,154
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars and all tabular amounts in millions unless
otherwise noted)
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1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Magna
International Inc. and its subsidiaries (collectively "Magna" or the
"Company") have been prepared in United States dollars following
Canadian generally accepted accounting principles ("GAAP") with
respect to the preparation of interim financial information.
Accordingly, they do not include all the information and footnotes as
required in the preparation of annual financial statements and should
be read in conjunction with the December 31, 2006 audited
consolidated financial statements and notes included in the Company's
2006 Annual Report. These interim consolidated financial statements
have been prepared using the same accounting policies as the
December 31, 2006 annual consolidated financial statements, except
for the accounting change set out in note 2.
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, 2007 and the results of operations
and cash flows for the three-months and years ended December 31, 2007
and 2006.
2. 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". The Company 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, the Company's accounting for financial instruments and
hedges complies with U.S. GAAP in all material respects as of
January 1, 2007.
Financial Instruments
Under the new standards, all of Magna's 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. The Company does not currently have any available
for sale financial assets.
Comprehensive Income
Other comprehensive income includes unrealized gains and losses on
translation of the Company's 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 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 that the hedged
item affects net income.
The impact of this accounting policy change 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
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Increase in other accrued liabilities $ 32
Increase in other long-term liabilities 17
Increase in future tax liabilities 13
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Decrease in accumulated other comprehensive income $ 3
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3. RUSSIAN MACHINES TRANSACTION
During 2007, following approval by Magna's Class A Subordinate Voting
and Class B Shareholders, the Company completed the court-approved
plan of arrangement (the "Arrangement") whereby OJSC Russian Machines
("Russian Machines"), a wholly owned subsidiary of Basic Element
Limited, made a major strategic investment in Magna.
The impact of this transaction on the consolidated balance sheet was
as follows:
Magna International Inc.
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