AURORA, ON, Aug. 6 /CNW/ - Magna International Inc. (TSX: MG.A; NYSE:
MGA) today reported financial results for the second quarter and six months
ended June 30, 2008.
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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2008 2007 2008 2007
---- ---- ---- ----
Sales $ 6,713 $ 6,731 $ 13,335 $ 13,154
Operating income $ 319 $ 377 $ 605 $ 682
Net income $ 227 $ 262 $ 434 $ 480
Diluted earnings per share $ 1.98 $ 2.35 $ 3.75 $ 4.32
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All results are reported in millions of U.S. dollars, except per share
figures, which are in U.S. dollars.
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THREE MONTHS ENDED JUNE 30, 2008
--------------------------------
We posted sales of $6.7 billion for the second quarter ended June 30,
2008, substantially unchanged over the second quarter of 2007. Increases in
our European and Rest of World production sales were offset by reductions in
North American production sales, complete vehicle assembly sales and tooling,
engineering and other sales.
During the second quarter of 2008, our North American and European
average dollar content per vehicle increased 2% and 23% respectively, over the
second quarter of 2007. Also, during the second quarter of 2008, North
American vehicle production declined 14% while European vehicle production was
essentially unchanged, each compared to the second quarter of 2007.
Complete vehicle assembly sales decreased 1% to $1.054 billion for the
second quarter of 2008 compared to $1.064 billion for the second quarter of
2007, while complete vehicle assembly volumes declined 28% to 39,726 units
compared to the second quarter of 2007.
During the second quarter of 2008, operating income was $319 million, net
income was $227 million and diluted earnings per share were $1.98. Operating
income decreased $58 million, net income decreased $35 million, and diluted
earnings per share decreased $0.37, each compared to the second quarter of
2007.
During the three months ended June 30, 2008, we generated cash from
operations before changes in non cash operating assets and liabilities of
$483 million, and invested $279 million in non cash operating assets and
liabilities. Total investment activities for the second quarter of 2008 were
$366 million, including $187 million in fixed asset additions, $97 million to
purchase subsidiaries and an $82 million increase in investments and other
assets.
During the second quarter ended June 30, 2008, we purchased for
cancellation 1.9 million Class A Subordinate Voting Shares for cash
consideration of $134 million, pursuant to the terms of our normal course
issuer bid program.
SIX MONTHS ENDED JUNE 30, 2008
------------------------------
We posted sales of $13.3 billion for the six months ended June 30, 2008,
an increase of 1% over the six months ended June 30, 2007. Increases in our
European and Rest of World production sales were partially offset by
reductions in North American production sales, complete vehicle assembly
sales, and tooling, engineering and other sales.
During the six months ended June 30, 2008, North American and European
average dollar content per vehicle increased 4% and 22%, respectively, each
over the comparable six-month period in 2007. During the six months ended
June 30, 2008, North American and European vehicle production declined 12% and
1%, respectively, each from the comparable six-month period in 2007.
Complete vehicle assembly sales decreased 1% to $2.140 billion for the
six months ended June 30, 2008 compared to $2.168 billion for the six months
ended June 30, 2007, while complete vehicle assembly volumes declined 28% to
83,272 units compared to the first six months of 2007.
During the six months ended June 30, 2008, operating income was
$605 million, net income was $434 million and diluted earnings per share were
$3.75. Operating income decreased $77 million, net income decreased
$46 million, and diluted earnings per share decreased $0.57, each compared to
the first six months of 2007.
During the six months ended June 30, 2008, we generated cash from
operations before changes in non cash operating assets and liabilities of
$925 million, and invested $497 million in non cash operating assets and
liabilities. Total investment activities for the first six months of 2008 were
$534 million, including $315 million in fixed asset additions, $105 million to
purchase subsidiaries, and a $114 million increase in investments and other
assets.
During the first six months of 2008, we purchased for cancellation
3.5 million Class A Subordinate Voting Shares for cash consideration of
$247 million, pursuant to the terms of our normal course issuer bid program.
A more detailed discussion of our consolidated financial results for the
second quarter and six months ended June 30, 2008 is contained in the
Management's Discussion and Analysis of Results of Operations and Financial
Position, and the unaudited interim consolidated financial statements and
notes thereto, which are attached to this Press Release.
DIVIDENDS
---------
Today, 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 June 30, 2008. The dividend of U.S. $0.36 per share is
payable on September 15, 2008 to shareholders of record on August 29, 2008.
2008 OUTLOOK
------------
We have significantly reduced our expectations for 2008 light vehicle
production volumes in North America. For the full year 2008, we now expect
light vehicle production volumes of approximately 13.2 million units in North
America and approximately 15.6 million units in Europe. Consequently, we
expect consolidated sales to be between $24.3 billion and $25.6 billion for
full year 2008. Full year 2008 average dollar content per vehicle is expected
to be between $850 and $880 in North America and between $485 and $510 in
Europe. We expect full year 2008 complete vehicle assembly sales to be between
$3.5 billion and $3.8 billion.
In addition, we expect that full year 2008 spending for fixed assets will
be in the range of $850 million to $900 million.
In our 2008 outlook we have assumed no significant acquisitions or
divestitures, and no significant labour disruptions in our principal markets.
In addition, we have assumed that foreign exchange rates for the most common
currencies in which we conduct business relative to our U.S. dollar reporting
currency will approximate current rates.
We are the most diversified global automotive supplier. We design,
develop and manufacture technologically advanced automotive systems,
assemblies, modules and components, and engineer and assemble complete
vehicles, primarily for sale to original equipment manufacturers ("OEMs") of
cars and light trucks. Our capabilities include the design, engineering,
testing and manufacture of automotive interior systems; seating systems;
closure systems; body and chassis systems; vision systems; electronic systems;
exterior systems; powertrain systems; roof systems; as well as complete
vehicle engineering and assembly.
We have approximately 82,000 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 second quarter results on Wednesday, August 6, 2008 at
5:00 p.m. EDT. 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 1-800-734-8592. 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 afternoon prior to the call.
For further information, please contact Louis Tonelli, Vice-President,
Investor Relations at 905-726 7035.
For teleconferencing questions, please contact Karin Kaminski at 905-726
7103.
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FORWARD-LOOKING STATEMENTS
--------------------------
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 six months ended
June 30, 2008 included in this Press Release, and the audited consolidated
financial statements and MD&A for the year ended December 31, 2007 included in
our 2007 Annual Report to Shareholders. The unaudited interim consolidated
financial statements for the three months and six months ended June 30, 2008
have been prepared in accordance with Canadian generally accepted accounting
principles ("GAAP") with respect to the preparation of interim financial
information and the audited consolidated financial statements for the year
ended December 31, 2007 have been prepared in accordance with Canadian GAAP.
This MD&A has been prepared as at August 6, 2008.
OVERVIEW
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We are the most diversified global automotive supplier. We design,
develop and manufacture technologically advanced automotive systems,
assemblies, modules and components, and engineer and assemble complete
vehicles, primarily for sale to original equipment manufacturers ("OEMs") of
cars and light trucks. Our capabilities include the design, engineering,
testing and manufacture of automotive interior systems; seating systems;
closure systems; body and chassis systems; vision systems; electronic systems;
exterior systems; powertrain systems; roof systems; as well as complete
vehicle engineering and assembly. We follow a corporate policy of functional
and operational decentralization, pursuant to which we conduct our operations
through divisions, each of which is an autonomous business unit operating
within pre-determined guidelines. As at June 30, 2008, 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 capabilities. In addition to maintaining key customer,
supplier and government contacts in their respective markets, our regional
management teams centrally manage key aspects of our operations while
permitting our divisions enough flexibility through our decentralized
structure to foster an entrepreneurial environment.
HIGHLIGHTS
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The North American automotive industry has continued to deteriorate in
2008, in terms of both vehicle sales and production. In recent months, the
rate of decline in vehicle sales has accelerated, particularly in the United
States, as a result of a weakening U.S. economy, rising fuel prices, and
tightening credit availability, among other factors. In addition, the North
American automotive industry has experienced a rapid shift in consumer
preferences away from many light trucks in favour of more fuel-efficient
vehicles. The declining sales and segment shifts have resulted in high
inventory levels on a number of vehicles, OEM announcements of capacity
reductions and significant production cuts. We currently anticipate that the
North American automotive industry will experience continued weak vehicle
production in the second half of 2008.
Some of the factors that have negatively impacted all of our OEM
customers, particularly rising fuel prices and the resulting shift away from
many light trucks, have had a more severe impact on our largest OEM customers
in North America since they derive a greater proportion of their sales from
light trucks. While overall North American vehicle production volumes declined
14% in the second quarter of 2008 compared to the second quarter of 2007,
General Motors ("GM"), Chrysler and Ford vehicle production declined by 27%,
18% and 15%, respectively. The lower production levels in North America at our
largest OEM customers negatively impacted our sales and earnings once again in
the second quarter of 2008, as our content on a number of their light truck
programs is higher than our consolidated average dollar content per vehicle in
North America. Given our expectations for continued weak vehicle production in
North America in the second half of the year, we expect our sales and earnings
to continue to be negatively impacted for the remainder of 2008.
Over the past two decades we have diversified our geographic sales,
initially by growing our business in Western Europe and more recently by doing
so in other markets, including Eastern Europe, Asia, South America and Africa.
As a result, we have become less dependent on the North American market for
our consolidated sales and profits. For the first time, our sales and
operating income in Europe exceeded those in North America, and in addition,
Rest of World sales and operating income continued to increase.
During the second quarter of 2008, we posted sales of $6.7 billion,
essentially unchanged from the second quarter of 2007. Increases in our
European and Rest of World production sales were offset by reductions in North
American production sales, complete vehicle assembly sales and tooling,
engineering and other sales. During the second quarter of 2008, North American
and European average dollar content per vehicle increased 2% and 23%,
respectively, over the second quarter of 2007, while North American vehicle
production declined 14% and European vehicle production remained essentially
unchanged, each compared to the second quarter of 2007.
Operating income for the second quarter of 2008 decreased 15% or
$58 million to $319 million from $377 million for the second quarter of 2007.
Excluding the unusual items recorded in the second quarters of 2008 and 2007
(see "Unusual Items" below), operating income for the second quarter of 2008
decreased $85 million or 21%. The decrease in operating income was primarily
due to decreased margins earned as a result of significantly lower production
volumes on certain programs in North America, decreased margins earned on
lower volumes for certain assembly programs, operational inefficiencies and
other costs at certain facilities, downsizing costs primarily in North
America, as well as incremental customer price concessions. These factors were
partially offset by an increase in operating income due to the currency
translation, favourable settlement on research and development incentives,
favourable revaluation of warranty accruals, productivity improvements at
certain divisions, additional margins earned on the launch of new programs
during or subsequent to the second quarter of 2007, lower incentive
compensation and lower stock compensation related to restricted shares.
Net income for the second quarter of 2008 decreased 13% or $35 million to
$227 million from $262 million for the second quarter of 2007. The decrease in
net income was a result of the decrease in operating income partially offset
by lower income taxes.
Diluted earnings per share for the second quarter of 2008 decreased 16%
or $0.37 to $1.98 from $2.35 for the second quarter of 2007 as a result of the
decrease in net income combined with an increase in the weighted average
number of diluted shares outstanding. The increase in the weighted average
number of diluted shares outstanding was primarily due to the Class A
Subordinate Voting Shares issued in 2007 in connection with the court-approved
plan of arrangement (the "Arrangement") whereby OJSC Russian Machines, a
wholly owned subsidiary of Basic Element Limited, made a major strategic
investment in Magna. This increase was partially offset by the purchase and
cancellation of Class A Subordinate Voting Shares under the terms of our
Substantial Issuer Bid ("SIB"), which was fully completed in 2007, as well as
our ongoing Normal Course Issuer Bid ("NCIB").
UNUSUAL ITEMS
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During the three months and six months ended June 30, 2008 and 2007, we
recorded certain unusual items as follows:
2008 2007
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Diluted Diluted
Earnings Operat- Earnings
Operating Net per ing Net per
Income Income Share Income Income Share
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Impairment
charges(1) $ (9) $ (7) $ (0.06) $ (22) $ (14) $ (0.12)
Restructuring
charges(1) - - - (14) (10) (0.09)
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Total second quarter
and year to date
unusual items $ (9) $ (7) $ (0.06) $ (36) $ (24) $ (0.21)
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(1) Restructuring and Impairment Charges
(a) For the six months ended June 30, 2008
During the second quarter of 2008, we recorded asset
impairments of $5 million relating to specific assets at a
seating systems facility in North America and $4 million
relating to specific assets at an interior systems facility in
Europe.
(b) For the six months ended June 30, 2007
During the second quarter of 2007, we recorded an asset
impairment of $22 million relating to specific assets at a
powertrain systems facility in the United States.
During the second quarter of 2007, we incurred restructuring
and rationalization charges of $10 million relating to two
facilities in North America and $4 million relating to one
facility in Europe.
CAPITAL TRANSACTIONS
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On November 12, 2007, we commenced an 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 June 30, 2008, we had purchased for cancellation
6.0 million Class A Subordinate Voting Shares for an aggregate purchase price
of $453 million, of which 1.9 million shares were purchased during the second
quarter of 2008 for an aggregate purchase price of $134 million. The NCIB will
expire on November 11, 2008, unless extended by us prior to that time.
INDUSTRY TRENDS AND RISKS
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Our success is primarily dependent upon the levels of North American and
European car and light truck production by our customers and the relative
amount of content we have on their various vehicle programs. OEM production
volumes in different regions may be impacted by factors which may vary from
one region to the next, including general economic and political conditions,
interest rates, credit availability, energy and fuel prices, international
conflicts, labour relations issues, regulatory requirements, trade agreements,
infrastructure considerations, legislative changes, and environmental
emissions standards and safety issues. A number of other economic, industry
and risk factors discussed in our Annual Information Form and Annual Report on
Form 40-F, each in respect of the year ended December 31, 2007, also affect
our success, including such things as relative currency values, commodities
prices, price reduction pressures from our customers, the financial condition
of our customers and our supply base and competition from manufacturers with
operations in low cost countries.
The economic, industry and risk factors discussed in our Annual
Information Form and Annual Report on Form 40-F, each in respect of the year
ended December 31, 2007, remain substantially unchanged in respect of the
second quarter ended June 30, 2008, except that the decline in North American
production volumes of our largest customers may be more rapid than previously
anticipated and such decline is expected to negatively impact our results for
the remainder of 2008.
RESULTS OF OPERATIONS
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Average Foreign Exchange
For the three months For the six months
ended June 30, ended June 30,
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2008 2007 Change 2008 2007 Change
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1 Canadian dollar equals U.S.
dollars 0.991 0.913 + 8% 0.994 0.884 + 13%
1 euro equals U.S. dollars 1.562 1.348 + 16% 1.530 1.330 + 15%
1 British pound equals U.S.
dollars 1.970 1.986 - 1% 1.974 1.970 -
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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 six months ended June 30, 2008 impacted the reported
U.S. dollar amounts of our sales, expenses and income.
The results of operations whose functional currency is not the U.S.
dollar are translated into U.S. dollars using the average exchange rates in
the table above for the relevant period. Throughout this MD&A, reference is
made to the impact of translation of foreign operations on reported U.S.
dollar amounts where relevant.
Our results can also be affected by the impact of movements in exchange
rates on foreign currency transactions (such as raw material purchases or
sales denominated in foreign currencies). However, as a result of hedging
programs employed by us, primarily in Canada, foreign currency transactions in
the current period have not been fully impacted by movements in exchange
rates. We record foreign currency transactions at the hedged rate where
applicable.
Finally, holding gains and losses on foreign currency denominated
monetary items, which are recorded in selling, general and administrative
expenses, impact reported results.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED JUNE 30, 2008
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Sales
For the three months
ended June 30,
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2008 2007 Change
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Vehicle Production Volumes
(millions of units)
North America 3.479 4.057 - 14%
Europe 4.251 4.254 -
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Average Dollar Content Per Vehicle
North America $ 858 $ 840 + 2%
Europe $ 500 $ 405 + 23%
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Sales
External Production
North America $ 2,986 $ 3,408 - 12%
Europe 2,126 1,723 + 23%
Rest of World 148 100 + 48%
Complete Vehicle Assembly 1,054 1,064 - 1%
Tooling, Engineering and Other 399 436 - 8%
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Total Sales $ 6,713 $ 6,731 -
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External Production Sales - North America
External production sales in North America decreased 12% or $422 million
to $3.0 billion for the second quarter of 2008 compared to $3.4 billion for
the second quarter of 2007. This decrease in production sales reflects a 14%
decrease in North American vehicle production volumes partially offset by a 2%
increase in our North American average dollar content per vehicle. More
importantly, during the second quarter of 2008 our largest customers in North
America continued to reduce vehicle production volumes compared to the second
quarter of 2007. While North American vehicle production volumes declined 14%
in the second quarter of 2008 compared to the second quarter of 2007, GM,
Chrysler and Ford vehicle production declined 27%, 18% and 15%, respectively.
The pick-up truck and SUV vehicle segments, in which GM, Ford and Chrysler
have relatively larger market share, have experienced severe declines in
production.
Our average dollar content per vehicle grew by 2% or $18 to $858 for the
second quarter of 2008 compared to $840 for the second quarter of 2007
primarily as a result of an increase in reported U.S. dollar sales due to the
strengthening of the Canadian dollar against the U.S. dollar. Excluding the
effect of foreign exchange, our average dollar content per vehicle decreased
primarily as a result of:
- the impact of lower production and/or content on certain programs,
including:
- GM's full-sized pickups and SUVs;
- the Ford F-Series SuperDuty;
- the Ford Explorer and Mercury Mountaineer;
- the Dodge Ram;
- the Dodge Nitro;
- the Saturn Outlook, Buick Enclave and GMC Acadia;
- the Chevrolet Trailblazer, GMC Envoy and Buick Rainier;
- the Hummer H3;
- the Ford Edge and Lincoln MKX;
- the Chrysler Sebring, Dodge Avenger and Dodge Stratus; and
- the Chrysler 300 and 300C, and Dodge Charger and Magnum;
- programs that ended production during or subsequent to the second
quarter of 2007, including:
- the Chrysler Pacifica; and
- the Pontiac Grand Prix; and
- incremental customer price concessions.
These factors were partially offset by:
- the launch of new programs during or subsequent to the second quarter
of 2007, including:
- the Dodge Grand Caravan and Chrysler Town & Country;
- the Dodge Journey;
- the Ford Flex;
- the Jeep Liberty;
- the Cadillac CTS; and
- the Ford Econoline;
- increased production and/or content on certain programs, including:
- the Ford Fusion, Mercury Milan and Lincoln MKZ; and
- the Ford Escape, Mercury Mariner and Mazda Tribute; and
- acquisitions completed subsequent to the second quarter of 2007,
including the acquisition of a stamping and sub-assembly facility in
Birmingham, Alabama from Ogihara America Corporation ("Ogihara") in
May 2008.
External Production Sales - Europe
External production sales in Europe increased 23% or $403 million to
$2.1 billion for the second quarter of 2008 compared to $1.7 billion for the
second quarter of 2007. This increase in production sales reflects a 23%
increase in our European average dollar content per vehicle.
Our average dollar content per vehicle grew by 23% or $95 to $500 for the
second quarter of 2008 compared to $405 for the second quarter of 2007,
primarily as a result of:
- an increase in reported U.S. dollar sales due to the strengthening of
the euro against the U.S. dollar;
- increased production and/or content on certain programs, including:
- the Mercedes-Benz C-Class;
- the MINI Clubman; and
- the Volkswagen Transporter/Multivan; and
- the launch of new programs during or subsequent to the second quarter
of 2007, including the Volkswagen Tiguan.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the MINI Cooper; and
- the BMW X3;
- programs that ended production during or subsequent to the second
quarter of 2007, including the Chrysler Voyager;
- the sale of certain facilities during or subsequent to the second
quarter of 2007; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in Rest of World increased 48% or $48 million to
$148 million for the second quarter of 2008 compared to $100 million for the
second quarter of 2007. The increase in production sales is primarily as a
result of:
- the launch of new programs during or subsequent to the second quarter
of 2007 in South Africa, Korea and China;
- increased production and/or content on certain programs in China and
Brazil; and
- an increase in reported U.S. dollar sales as a result of the
strengthening of the Brazilian real and Chinese Renminbi, each
against the U.S. dollar.
Complete Vehicle Assembly Sales
The terms of our various vehicle assembly contracts differ with respect
to the ownership of components and supplies related to the assembly process
and the method of determining the selling price to the OEM customer. Under
certain contracts we are acting as principal, and purchased components and
systems in assembled vehicles are included in our inventory and cost of sales.
These costs are reflected on a full-cost basis in the selling price of the
final assembled vehicle to the OEM customer. Other contracts provide that
third party components and systems are held on consignment by us, and the
selling price to the OEM customer reflects a value-added assembly fee only.
Production levels of the various vehicles assembled by us have an impact
on the level of our sales and profitability. In addition, the relative
proportion of programs accounted for on a full-cost basis and programs
accounted for on a value-added basis, also impacts our level of sales and
operating margin percentage, but may not necessarily affect our overall level
of profitability. Assuming no change in total vehicles assembled, a relative
increase in the assembly of vehicles accounted for on a full-cost basis has
the effect of increasing the level of total sales, however, because purchased
components are included in cost of sales, profitability as a percentage of
total sales is reduced. Conversely, a relative increase in the assembly of
vehicles accounted for on a value-added basis has the effect of reducing the
level of total sales and increasing profitability as a percentage of total
sales.
For the three months
ended June 30,
--------------------
2008 2007 Change
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Complete Vehicle Assembly Sales $ 1,054 $ 1,064 - 1%
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Complete Vehicle Assembly Volumes (Units)
Full-Costed:
BMW X3, Mercedes-Benz G-Class, and
Saab 9(3) Convertible 31,413 36,436 - 14%
Value-Added:
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and
Jeep Commander 8,313 18,916 - 56%
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39,726 55,352 - 28%
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Complete vehicle assembly sales decreased 1% or $10 million to
$1.05 billion for the second quarter of 2008 compared to $1.06 billion for the
second quarter of 2007 while assembly volumes decreased 28% or 15,626 units.
The decrease in complete vehicle assembly sales is primarily as a result of:
- the end of production of the Chrysler Voyager at our Graz assembly
facility in the fourth quarter of 2007; and
- a decrease in assembly volumes for the BMW X3, Saab 9(3) Convertible,
Chrysler 300, Jeep Commander and Grand Cherokee.
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.
Tooling, Engineering and Other
Tooling, engineering and other sales decreased 8% or $37 million to
$399 million for the second quarter of 2008 compared to $436 million for the
second quarter of 2007.
In the second quarter of 2008 the major programs for which we recorded
tooling, engineering and other sales were:
- the Mazda 6;
- the MINI Cooper, Clubman, Crossman;
- the Mercedes-Benz C-Class;
- the Renault Trafic and Nissan Primastar;
- the Suzuki XL7;
- GM's full-size pickups;
- the BMW X3;
- the Audi A5;
- the Honda Pilot; and
- the Porsche Boxster.
In the second quarter of 2007 the major programs for which we recorded
tooling, engineering and other sales were:
- the Ford Flex;
- the Dodge Grand Caravan and Chrysler Town & Country;
- GM's full-size pickups;
- the Cadillac STS; and
- the Mazda 6.
In addition, tooling, engineering and other sales benefited from the
strengthening of the euro and Canadian dollar, each against the U.S. dollar.
Gross Margin
Gross margin decreased $77 million to $895 million for the second quarter
of 2008 compared to $972 million for the second quarter of 2007 and gross
margin as a percentage of total sales decreased to 13.3% for the second
quarter of 2008 compared to 14.4% for the second quarter of 2007. The unusual
items discussed in the "Unusual Items" section above negatively impacted gross
margin as a percentage of total sales in the second quarter of 2007 by 0.2%.
Excluding these unusual items, the 1.3% decrease in gross margin as a
percentage of total sales was primarily as a result of:
- lower gross margin earned as a result of a significant decrease in
production volumes for certain programs, substantially in North
America;
- operational inefficiencies and other costs at certain facilities, in
particular at certain interior systems facilities in North America;
- downsizing costs primarily in North America; and
- incremental customer price concessions.
These factors were partially offset by:
- productivity and efficiency improvements at certain facilities;
- a favourable settlement on research and development incentives;
- a favourable revaluation of warranty accruals; and
- improvements as a result of prior years' restructuring activities.
Depreciation and Amortization
Depreciation and amortization costs increased 9% or $18 million to
$228 million for the second quarter of 2008 compared to $210 million for the
second quarter of 2007. The increase in depreciation and amortization was
primarily as a result of:
- an increase in reported U.S. dollar depreciation and amortization due
to the strengthening of the Canadian dollar and euro, each against
the U.S. dollar; and
- the launch of new programs during or subsequent to the second
quarter of 2007.
These factors were partially offset by:
- the sale or disposition of certain facilities subsequent to the
second quarter of 2007; and
- the write-down of certain assets during or subsequent to the second
quarter of 2007.
Selling, General and Administrative ("SG&A")
SG&A expense as a percentage of sales was 5.4% for the second quarter of
2008, compared to 5.6% for the second quarter of 2007. SG&A expense decreased
4% or $14 million to $364 million for the second quarter of 2008 compared to
$378 million for the second quarter of 2007. Excluding the unusual items
discussed in the "Unusual Items" section above, SG&A decreased by $12 million.
The strengthening of the Canadian dollar and euro, each against the U.S.
dollar, resulted in a significant increase in our reported U.S. dollar SG&A
expense. Despite the effect of foreign exchange, SG&A expense decreased
primarily as a result of:
- reduced spending at certain facilities;
- reduced stock compensation costs related to accelerated restricted
share agreements in the second quarter of 2007;
- lower incentive compensation; and
- the sale or disposition of certain facilities during or subsequent to
the second quarter of 2007.
These factors were partially offset by higher infrastructure costs related
to programs that launched during or subsequent to the second quarter of 2007.
Earnings before Interest and Taxes ("EBIT")(1)
For the three months
ended June 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
North America $ 141 $ 262 - 46%
Europe 145 96 + 51%
Rest of World 13 5 + 160%
Corporate and Other 5 1 + 400%
-------------------------------------------------------------------------
Total EBIT $ 304 $ 364 - 16%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in EBIT for the second quarters of 2008 and 2007 were the
following unusual items, which have been discussed in the "Unusual Items"
section above.
For the three months
ended June 30,
----------------------
2008 2007
-------------------------------------------------------------------------
North America
Impairment charges $ (5) $ (22)
Restructuring charges - (10)
-------------------------------------------------------------------------
(5) (32)
-------------------------------------------------------------------------
Europe
Impairment charges (4) -
Restructuring charges - (4)
-------------------------------------------------------------------------
(4) (4)
-------------------------------------------------------------------------
$ (9) $ (36)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBIT is defined as income from operations before income taxes as
presented on our unaudited interim consolidated financial statements
before net interest income.
North America
EBIT in North America decreased 46% or $121 million to $141 million for
the second quarter of 2008 compared to $262 million for the second quarter of
2007. Excluding the North American unusual items discussed in the "Unusual
Items" section above, the $148 million decrease in EBIT was primarily as a
result of:
- lower earnings as a result of a significant decrease in production
volumes for certain programs;
- operational inefficiencies and other costs at certain facilities, in
particular at certain interior systems facilities;
- higher employee profit sharing; and
- incremental customer price concessions.
These factors were partially offset by:
- a favourable settlement on research and development incentives;
- productivity and efficiency improvements at certain facilities;
- incremental margin earned on new programs that launched during or
subsequent to the second quarter of 2007;
- incremental margin earned as a result of increased production volumes
for certain programs;
- lower affiliation fees paid to corporate; and
- lower incentive compensation.
Europe
EBIT in Europe increased 51% or $49 million to $145 million for the second
quarter of 2008 compared to $96 million for the second quarter of 2007.
Excluding the European unusual items discussed in the "Unusual Items" section
above, the $49 million increase in EBIT was primarily as a result of:
- an increase in reported U.S. dollar EBIT as a result of the
strengthening of the euro against the U.S.
