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. dollar;
- a favourable revaluation of warranty accruals;
- productivity and efficiency improvements at certain facilities, in
particular at certain interior systems facilities;
- the sale and/or closure of certain divisions subsequent to the second
quarter of 2007;
- lower employee profit sharing; and
- increased margins earned on production programs that launched during
or subsequent to the second quarter of 2007.
These factors were partially offset by:
- lower margins earned as a result of a decrease in vehicle production
volumes for certain programs including the end of production of the
Chrysler Voyager at our Graz assembly facility in the fourth quarter
of 2007;
- operational inefficiencies and other costs at certain facilities;
- costs incurred in preparation for upcoming launches or for programs
that have not fully ramped up production;
- costs incurred to develop and grow our electronics capabilities; and
- incremental customer price concessions.
Rest of World
Rest of World EBIT increased $8 million to $13 million for the second
quarter of 2008 compared to $5 million for the second quarter of 2007
primarily as a result of:
- additional margin earned on the increase in production sales
discussed above; and
- improved operating efficiencies at certain facilities, primarily in
China.
These factors were partially offset by costs incurred at other new
facilities, primarily in China, as we continue to pursue opportunities in this
growing market.
Corporate and Other
Corporate and Other EBIT increased $4 million to $5 million for the second
quarter of 2008 compared to $1 million for the second quarter of 2007
primarily as a result of:
- decreased stock compensation costs as discussed in the "SG&A" section
above;
- decreased consulting fees related to a purchasing initiative in the
second quarter of 2007; and
- lower incentive compensation.
These factors were partially offset by a decrease in affiliation fees
earned from our divisions.
Interest Income, net
During the second quarter of 2008, we earned net interest income of
$15 million, compared to $13 million for the second quarter of 2007. The
$2 million increase in net interest income is as a result of:
- an increase in interest income earned, including interest earned on
the net cash received from the Arrangement; and
- a reduction in interest expense, primarily as a result of the
repayment in January 2008 of the fourth series of our senior
unsecured notes related to the acquisition of New Venture Gear
("NVG").
Operating Income
Operating income decreased 15% or $58 million to $319 million for the
second quarter of 2008 compared to $377 million for the second quarter of
2007. This decrease in operating income is the result of the decrease in EBIT
partially offset by the increase in net interest income earned, both as
discussed above.
Income Taxes
Our effective income tax rate on operating income (excluding equity
income) decreased to 29.8% for the second quarter of 2008 compared to 30.7%
for the second quarter of 2007. In the second quarters of 2007 and 2008,
income tax rates were impacted by the unusual items discussed in the "Unusual
Items" section above. Excluding the unusual items, our effective income tax
rate decreased to 29.6% for the second quarter of 2008 compared to 30.9% for
the second quarter of 2007. The decrease in the effective income tax rate is
primarily as a result of a decrease in income tax rates in Canada and Germany.
Net Income
Net income decreased by 13% or $35 million to $227 million for the second
quarter of 2008 compared to $262 million for the second quarter of 2007. This
decrease in net income is the result of the decrease in operating income
partially offset by lower income taxes, both as discussed above.
Earnings per Share
For the three months
ended June 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
Earnings per Class A Subordinate Voting
or Class B Share
Basic $ 2.01 $ 2.40 - 16%
Diluted $ 1.98 $ 2.35 - 16%
-------------------------------------------------------------------------
Average number of Class A Subordinate
Voting and Class B Shares outstanding
(millions)
Basic 113.1 109.1 + 4%
Diluted 115.5 112.0 + 3%
-------------------------------------------------------------------------
Diluted earnings per share decreased 16% or $0.37 to $1.98 for the second
quarter of 2008 compared to $2.35 for the second quarter of 2007. Excluding
the unusual items, discussed in the "Unusual Items" section above, diluted
earnings per share for the second quarter of 2008 decreased $0.52 from the
second quarter of 2007 as a result of a decrease in net income (excluding
unusual items) combined with an increase in the weighted average number of
diluted shares outstanding during the quarter.
The increase in the weighted average number of diluted shares outstanding
was primarily the result of Class A Subordinate Voting Shares that were issued
in the third quarter of 2007 related to the Arrangement partially offset by
the purchase and cancellation of Class A Subordinate Voting Shares under the
terms of our SIB, which was fully completed in 2007, as well as our ongoing
NCIB.
Return on Funds Employed ("ROFE")(1)
An important financial ratio that we use across all of our operations to
measure return on investment is ROFE.
ROFE for the second quarter of 2008 was 17.2%, compared to 22.3% for the
second quarter of 2007. The unusual items discussed in the "Unusual Items"
section above negatively impacted ROFE in the second quarter of 2008 by 0.5%
and negatively impacted ROFE in the second quarter of 2007 by 2.2%.
Excluding these unusual items, the 6.8% decrease in ROFE was as a result
of the decrease in EBIT, as described above, combined with a $600 million
increase in average funds employed for the second quarter of 2008 compared to
the second quarter of 2007. The increase in our average funds employed was
primarily as a result of:
- the strengthening of the Canadian dollar and euro, each against the
U.S. dollar;
- an increase in our average investment in working capital; and
- an increase in our long-term investments due to the reclassification
of asset-backed commercial paper ("ABCP") as discussed in the "Cash
Resources" section below.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
-------------------------------------------------------------------------
Cash Flow from Operations
For the three months
ended June 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
Net income $ 227 $ 262
Items not involving current cash flows 256 241
-------------------------------------------------------------------------
483 503 $ (20)
Changes in non-cash operating assets
and liabilities (279) (221)
-------------------------------------------------------------------------
Cash provided from operating activities $ 204 $ 282 $ (78)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flow from operations before changes in non-cash operating assets and
liabilities decreased $20 million to $483 million for the second quarter of
2008 compared to $503 million for the second quarter of 2007. The decrease in
cash flow from operations was due to a $35 million decrease in net income, as
discussed above, partially offset by a $15 million increase in items not
involving current cash flows. Items not involving current cash flows are
comprised of the following:
For the three months
ended June 30,
----------------------
2008 2007
-------------------------------------------------------------------------
Depreciation and amortization $ 228 $ 210
Long-lived asset impairments 9 22
Equity income (10) (2)
Future income taxes and non-cash portion of
current taxes (4) (19)
Other non-cash charges 33 30
-------------------------------------------------------------------------
Items not involving current cash flows $ 256 $ 241
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) ROFE is defined as EBIT divided by the average funds employed for the
period. Funds employed is defined as long-term assets, excluding
future tax assets, plus non-cash operating assets and liabilities.
Non-cash operating assets and liabilities are defined as the sum of
accounts receivable, inventory, income taxes recoverable and prepaid
assets less the sum of accounts payable, accrued salaries and wages,
other accrued liabilities, income taxes payable and deferred
revenues.
Cash invested in non-cash operating assets and liabilities amounted to
$279 million for the second quarter of 2008 compared to $221 million for the
second quarter of 2007. The change in non-cash operating assets and
liabilities is comprised of the following sources (and uses) of cash:
For the three months
ended June 30,
----------------------
2008 2007
-------------------------------------------------------------------------
Accounts receivable $ (20) $ (117)
Inventory (81) (8)
Prepaid expenses and other (80) 1
Accounts payable and other accrued liabilities (35) (109)
Income taxes payable (58) 18
Deferred revenue (5) (6)
-------------------------------------------------------------------------
Changes in non-cash operating assets
and liabilities $ (279) $ (221)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The increase in inventory in the second quarter of 2008 was primarily due
to an increase in tooling inventory related to programs launching during or
subsequent to the second quarter of 2008. The increase in prepaid expenses and
other was primarily due to the deferral of buy-down payments made to employees
of our powertrain systems facility in Syracuse, which are being amortized over
the term of the collective bargaining agreement. The decrease in income taxes
payable was primarily due to a favourable settlement on research and
development incentives and the amount of income tax instalments.
Capital and Investment Spending
For the three months
ended June 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
Fixed assets $ (187) $ (137)
Other assets (82) (10)
-------------------------------------------------------------------------
Fixed and other assets additions (269) (147)
Purchase of subsidiaries (97) -
Proceeds from disposals 19 12
-------------------------------------------------------------------------
Cash used in investing activities $ (347) $ (135) $ (212)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed and other assets additions
In the second quarter of 2008 we invested $187 million in fixed assets.
While investments were made to refurbish or replace assets consumed in the
normal course of business and for productivity improvements, a large portion
of the investment in the second quarter of 2008 was for manufacturing
equipment for programs that launched during the second quarter of 2008, or
will be launching subsequent to the second quarter of 2008.
In the second quarter of 2008, we invested $82 million in other assets
related primarily to fully reimbursable planning and engineering costs for
programs that will be launching during or subsequent to 2008.
Purchase of subsidiaries
During the second quarter of 2008, we acquired a stamping and
sub-assembly facility from Ogihara in Birmingham, Alabama. We also were the
successful bidder to acquire a substantial portion of exteriors business and
related assets from Plastech Engineered Products Inc., in a Chapter 11 sale
out of bankruptcy. The total consideration for these acquisitions was
$99 million, consisting of $97 million paid in cash and $2 million of assumed
debt.
Proceeds from disposal
Proceeds from disposal in the second quarter of 2008 and 2007 were
$19 million and $12 million, respectively, which represent normal course fixed
and other asset disposals.
Financing
For the three months
ended June 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
Repayments of debt $ (16) $ (5)
Issues of debt 27 54
Issues of Class A Subordinate
Voting Shares - 19
Repurchase of Class A Subordinate
Voting Shares (134) -
Cash dividends paid (40) (26)
-------------------------------------------------------------------------
Cash used in financing activities $ (163) $ 42 $ (205)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The repayments of debt in the second quarter of 2008 include the
repayment of government debt in Europe.
The issues of debt relate primarily to increases in bank indebtedness in
Rest of World.
During the second quarter of 2007, we received cash proceeds of
$19 million on the exercise of stock options for Class A Subordinate Voting
Shares.
During the second quarter of 2008, we purchased 1.9 million Class A
Subordinate Voting Shares for an aggregate purchase price of $134 million in
relation to our NCIB, as discussed above.
The increase in cash dividends paid was the result of an increase in the
dividend per Class A Subordinate Voting or Class B Share to $0.36 for the
second quarter of 2008 compared to $0.24 for the second quarter of 2007.
Financing Resources
As at As at
June 30, December
2008 31, 2007 Change
-------------------------------------------------------------------------
Liabilities
Bank indebtedness $ 111 $ 89
Long-term debt due within one year 304 374
Long-term debt 339 337
-------------------------------------------------------------------------
754 800
Shareholders' equity 8,817 8,642
-------------------------------------------------------------------------
Total capitalization $ 9,571 $ 9,442 $ 129
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total capitalization increased by $129 million to $9.57 billion at
June 30, 2008 compared to $9.44 billion at December 31, 2007. The increase in
capitalization was a result of a $175 million increase in shareholders'
equity, partially offset by a $46 million decrease in liabilities.
The decrease in liabilities is primarily as a result of the repayment of
the fourth series of our senior unsecured notes related to the NVG
acquisition.
The increase in shareholders' equity was primarily as a result of:
- net income earned during the first six months of 2008 (as discussed
above); and
- a $60 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 and euro, each
against the U.S. dollar between December 31, 2007 and June 30, 2008.
These factors were partially offset by:
- the purchase for cancellation of Class A Subordinate Voting Shares in
connection with the NCIB; and
- dividends paid during the first six months of 2008.
Cash Resources
During the first six months of 2008, our cash resources decreased by
$434 million to $2.5 billion as a result of the cash used in investing and
financing activities, partially offset by the cash provided from operating
activities, all as discussed above. In addition to our cash resources, we had
term and operating lines of credit totalling $2.1 billion, of which
$1.8 billion was unused and available.
In addition, at June 30, 2008, we held Canadian third party ABCP with a
face value of Cdn$134 million. When acquired, these investments were rated R1
(High) by Dominion Bond Rating Service ("DBRS"), which was the highest credit
rating issued for commercial paper. These investments did not settle at the
scheduled maturity during the third quarter of 2007 due to ABCP market
liquidity issues, and as a result we reclassified our ABCP to long-term
investments from cash and cash equivalents. At June 30, 2008, the carrying
value of this investment was Cdn$104 million (December 31, 2007 -
Cdn$121 million), which was based on a valuation technique estimating the fair
value from the perspective of a market participant. Refer to note 9 of our
2007 audited consolidated financial statements for more information regarding
the significant estimates and assumptions incorporated into the valuation of
our ABCP.
During the first quarter of 2008, we recorded a $17 million impairment
charge related to our investment in ABCP due to a widening of the spread
between the anticipated return on the restructuring notes (the "Notes") that
are expected to continue performing and current market rates for instruments
of comparable credit quality, term and structure. The widening of the spread
during the first quarter of 2008 was primarily due to:
- the anticipated downgrade of the Notes' credit quality by DBRS. The
proposed restructuring plan now anticipates that the Notes will be
rated AA as compared to AAA at December 31, 2007; and
- the widening of market credit spreads as a result of deterioration in
credit markets during the quarter.
We did not record an adjustment to the carrying value of our investment
during the second quarter of 2008, however, 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
could 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 options and Subordinated Debentures
issued and outstanding at August 6, 2008 were exercised or converted:
Class A Subordinate Voting and Class B Shares 112,587,062
Subordinated Debentures(i) 1,096,589
Stock options(ii) 2,935,590
-------------------------------------------------------------------------
116,619,241
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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. All or
part of the 6.5% Convertible Subordinated Debentures are currently
redeemable at our option.
The above amounts also exclude Class A Subordinate Voting Shares
issuable, only at our option, to settle the 7.08% Subordinated
Debentures on redemption or maturity. The number of shares issuable
is dependent on the trading price of Class A Subordinate Voting
Shares at redemption or maturity of the 7.08% Subordinated
Debentures.
(ii) Options to purchase Class A Subordinate Voting Shares are
exercisable by the holder in accordance with the vesting provisions
and upon payment of the exercise price as may be determined from
time to time pursuant to our stock option plans.
Contractual Obligations and Off-Balance Sheet Financing
There have been no material changes with respect to the contractual
obligations requiring annual payments during the second quarter of 2008 that
are outside the ordinary course of our business. Refer to our MD&A included in
our 2007 Annual Report.
Long-term receivables in other assets are reflected net of outstanding
borrowings from a customer's finance subsidiary of $21 million since we have
the legal right of set-off of our long-term receivable against such borrowings
and we are settling the related amounts simultaneously.
RESULTS OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 2008
-------------------------------------------------------------------------
Sales
For the six months
ended June 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
Vehicle Production Volumes
(millions of units)
North America 6.966 7.886 - 12%
Europe 8.447 8.503 - 1%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 866 $ 836 + 4%
Europe $ 487 $ 398 + 22%
-------------------------------------------------------------------------
Sales
External Production
North America $ 6,035 $ 6,595 - 8%
Europe 4,111 3,380 + 22%
Rest of World 269 187 + 44%
Complete Vehicle Assembly 2,140 2,168 - 1%
Tooling, Engineering and Other 780 824 - 5%
-------------------------------------------------------------------------
Total Sales $ 13,335 $ 13,154 + 1%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
External Production Sales - North America
External production sales in North America decreased 8% or $560 million
to $6.0 billion for the six months ended June 30, 2008 compared to
$6.6 billion for the six months ended June 30, 2007. This decrease in
production sales reflects a 12% decrease in North American vehicle production
volumes partially offset by a 4% increase in our North American average dollar
content per vehicle. More importantly, during the first half of 2008 our
largest customers in North America continued to reduce vehicle production
volumes compared to the first half of 2007. While North American vehicle
production volumes declined 12% in the first six months of 2008 compared to
the first six months of 2007, GM and Chrysler vehicle production declined 22%
and 16%, respectively. The pick-up truck and SUV vehicle segments, in which
GM, Ford and Chrysler have relatively larger market share, have experienced
the most severe decline in production.
Our average dollar content per vehicle grew by 4% or $30 to $866 for the
six months ended June 30, 2008 compared to $836 for the six months ended
June 30, 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 Explorer and Mercury Mountaineer;
- the Saturn Outlook and GMC Acadia;
- the Hummer H3;
- the Dodge Nitro;
- the Chevrolet Trailblazer, GMC Envoy and Buick Rainier; and
- the Ford F-Series SuperDuty;
- programs that ended production during or subsequent to the six months
ended June 30, 2007, including:
- the Chrysler Pacifica; and
- the Saturn ION; and
- incremental customer price concessions.
These factors were partially offset by:
- the launch of new programs during or subsequent to the six months
ended June 30, 2007, including:
- the Dodge Grand Caravan and Chrysler Town & Country;
- the Dodge Journey;
- the Jeep Liberty;
- the Ford Escape, Mercury Mariner and Mazda Tribute;
- the Buick Enclave;
- the Cadillac CTS;
- the Ford Flex; and
- the Ford Econoline;
- increased production and/or content on certain programs, including:
- the Ford Fusion, Mercury Milan and Lincoln MKZ; and
- the BMW X5; and
- acquisitions completed subsequent to the first six months of 2007,
including the acquisition of a stamping and sub-assembly facility in
Birmingham, Alabama from Ogihara in May 2008.
External Production Sales - Europe
External production sales in Europe increased 22% or $731 million to
$4.1 billion for the six months ended June 30, 2008 compared to $3.4 billion
for the six months ended June 30, 2007. This increase in production sales
reflects a 22% increase in our European average dollar content per vehicle
partially offset by a 1% decrease in European vehicle production volumes.
Our average dollar content per vehicle grew by 22% or $89 to $487 for the
six months ended June 30, 2008 compared to $398 for the six months ended
June 30, 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 Volkswagen Transporter/Multivan;
- the smart fortwo;
- the Porsche Cayenne and Volkswagen Touareg; and
- the Volkswagen Caddy; and
- the launch of new programs during or subsequent to the first six
months of 2007, including:
- the Volkswagen Tiguan; and
- the MINI Clubman;.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the MINI Cooper; and
- the BMW X3;
- programs that ended production during or subsequent to the first
six months of 2007, including the Chrysler Voyager;
- the sale of certain facilities during or subsequent to the first six
months of 2007; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in the Rest of World increased 44% or
$82 million to $269 million for the six months ended June 30, 2008 compared to
$187 million for the six months ended June 30, 2007. The increase in
production sales is primarily a result of:
- the launch of new programs during or subsequent to the six months
ended June 30, 2007 in South Africa, China and Korea;
- increased production and/or content on certain programs in China and
Brazil; and
- an increase in reported U.S. dollar sales as a result of the
strengthening of the Brazilian real and Chinese Renminbi, each
against the U.S. dollar.
Complete Vehicle Assembly Sales
For the six months
ended June 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales $ 2,140 $ 2,168 - 1%
-------------------------------------------------------------------------
Complete Vehicle Assembly Volumes (Units)
Full-Costed: 64,294 74,673 - 14%
BMW X3, Mercedes-Benz E-Class and
G-Class, and Saab 9(3) Convertible
Value-Added: 18,978 41,448 - 54%
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep Commander
-------------------------------------------------------------------------
83,272 116,121 - 28%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Complete vehicle assembly sales decreased 1% or $28 million 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 assembly volumes
decreased 28% or 32,849 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; and
- higher assembly volumes for the Mercedes-Benz G-Class.
Tooling, Engineering and Other
Tooling, engineering and other sales decreased 5% or $44 million to
$780 million for the six months ended June 30, 2008 compared to $824 million
for the six months ended June 30, 2007.
In the six months ended June 30, 2008, the major programs for which we
recorded tooling, engineering and other sales were:
- the BMW Z4, X3 and 1-Series;
- GM's full-size pickups;
- the Mazda 6;
- the MINI Cooper, Clubman and Crossman;
- the Mercedes-Benz C-Class;
- the Audi A5;
- the Peugeot A58;
- the Renault Trafic and Nissan Primastar;
- the Ford F-Series; and
- the Suzuki XL7.
In the six months ended June 30, 2007, the major programs for which we
recorded tooling, engineering and other sales were:
- the BMW X3;
- the Ford Flex;
- the Dodge Grand Caravan and Chrysler Town & Country;
- GM's full-size pickups;
- the Mazda 6;
- the Ford F-Series;
- the Cadillac STS; and
- the Audi A5.
In addition, tooling, engineering and other sales benefited from the
strengthening of the euro and Canadian dollar, each against the U.S. dollar.
EBIT
For the six months
ended June 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
North America $ 288 $ 408
Europe 264 216
Rest of World 20 10
Corporate and Other (1) 26
-------------------------------------------------------------------------
Total EBIT $ 571 $ 660 - 13%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in EBIT for the six-month periods ended June 30, 2008 and 2007
were the following unusual items, which have been discussed in the "Unusual
Items" section above.
For the six 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)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America
EBIT in North America decreased 29% or $120 million to $288 million for
the six months ended June 30, 2008 compared to $408 million for the six months
ended June 30, 2007. Excluding the North American unusual items discussed in
the "Unusual Items" section above, EBIT decreased $147 million, 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 and powertrain facilities;
- higher employee profit sharing; and
- incremental customer price concessions.
These factors were partially offset by:
- a favourable settlement on research and development incentives;
- incremental margin earned on new programs that launched during or
subsequent to the six months ended June 30, 2007;
- productivity and efficiency improvements at certain facilities;
- 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 22% or $48 million to $264 million for the
six months ended June 30, 2008 compared to $216 million for the six months
ended June 30, 2007. Excluding the European unusual items discussed in the
"Unusual Items" section above, EBIT increased by $48 million, primarily as a
result of:
- incremental margin earned on new programs that launched during or
subsequent to the six months ended June 30, 2007;
- an increase in reported U.S. dollar EBIT as a result of the
strengthening of the euro against the U.S. dollar;
- operational improvements at certain facilities, in particular at
certain interior systems facilities;
- a favourable revaluation of warranty accruals;
- lower employee profit sharing and incentive compensation;
- incremental margin earned on higher volumes for certain production
programs; and
- the sale and/or closure of certain underperforming divisions during
or subsequent to the first six months of 2007.
These factors were partially offset by:
- lower margins earned as a result of a decrease in vehicle production
volumes for certain programs, including the end of production of the
Chrysler Voyager at our Graz assembly facility in the fourth quarter
of 2007;
- costs incurred in preparation for upcoming launches or for programs
that have not fully ramped up production;
- operational inefficiencies and other costs at certain facilities;
- costs incurred to develop and grow our electronics capabilities; and
- incremental customer price concessions.
Rest of World
EBIT in Rest of World increased $10 million to $20 million for the
six months ended June 30, 2008 compared to the six months ended June 30, 2007.
EBIT increased primarily as a result of:
- additional margin earned on the increase in production sales
discussed above; and
- improved operating efficiencies at certain facilities, primarily in
China.
These factors were partially offset by a decrease in equity income earned
on our 41% interest in Shin Young Metal Ind. Co. and costs incurred at other
new facilities, primarily in China, as we continue to pursue opportunities in
this growing market.
Corporate and Other
Corporate and Other EBIT declined $27 million to a loss of $1 million for
the six months ended June 30, 2008 compared to earnings of $26 million for the
six months ended June 30, 2007. The decrease in EBIT was primarily as a result
of:
- the impairment of our investment in ABCP as discussed in the "Cash
Resources" section above;
- a decrease in affiliation fees earned from our divisions; and
- higher charitable donations.
These factors were partially offset by decreased stock compensation costs
as discussed in the SG&A section above.
COMMITMENTS AND CONTINGENCIES
-------------------------------------------------------------------------
From time to time, we may be contingently liable for litigation and other
claims.
Refer to note 24 of our 2007 audited consolidated financial statements,
which describes these claims.
CONTROLS AND PROCEDURES
-------------------------------------------------------------------------
There have been no changes in our internal controls over financial
reporting that occurred during the three months ended June 30, 2008 that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
-------------------------------------------------------------------------
The previous discussion may contain statements that, to the extent that
they are not recitations of historical fact, constitute "forward-looking
statements" within the meaning of applicable securities legislation.
Forward-looking statements may include financial and other projections, as
well as statements regarding our future plans, objectives or economic
performance, or the assumptions underlying any of the foregoing. We use words
such as "may", "would", "could", "will", "likely", "expect", "anticipate",
"believe", "intend", "plan", "forecast", "project", "estimate" and similar
expressions to identify forward-looking statements. Any such forward-looking
statements are based on assumptions and analyses made by us in light of our
experience and our perception of historical trends, current conditions and
expected future developments, as well as other factors we believe are
appropriate in the circumstances. However, whether actual results and
developments will conform with our expectations and predictions is subject to
a number of risks, assumptions and uncertainties. These risks, assumptions and
uncertainties include, without limitation: 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 Six months ended
June 30, June 30,
--------------------- ---------------------
Note 2008 2007 2008 2007
-------------------------------------------------------------------------
Sales $ 6,713 $ 6,731 $ 13,335 $ 13,154
-------------------------------------------------------------------------
Cost of goods sold 5,818 5,759 11,602 11,339
Depreciation and
amortization 228 210 447 413
Selling, general and
administrative 7 364 378 723 728
Interest income, net (15) (13) (34) (22)
Equity income (10) (2) (17) (8)
Impairment charges 2 9 22 9 22
-------------------------------------------------------------------------
Income from operations
before income taxes 319 377 605 682
Income taxes 92 115 171 202
-------------------------------------------------------------------------
Net income 227 262 434 480
Other comprehensive
income: 10
Net unrealized gains on
translation of net
investment
in foreign operations 10 245 60 301
Repurchase of shares 8 (17) - (32) -
Net unrealized gains
(losses) on cash flow
hedges 19 (2) 6 -
Reclassifications of net
losses (gains) on cash
flow hedges to net income 3 (1) (2) 4
-------------------------------------------------------------------------
Comprehensive income $ 242 $ 504 $ 466 $ 785
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per Class A
Subordinate Voting or
Class B Share:
Basic $ 2.01 $ 2.40 $ 3.81 $ 4.40
Diluted $ 1.98 $ 2.35 $ 3.75 $ 4.32
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash dividends paid per
Class A Subordinate
Voting or Class B Share $ 0.36 $ 0.24 $ 0.72 $ 0.43
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A
Subordinate Voting and
Class B
Shares outstanding during
the period (in millions):
Basic 113.1 109.1 114.0 109.0
Diluted 115.5 112.0 116.3 111.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
(U.S. dollars in millions)
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Retained earnings, beginning
of period $ 3,647 $ 3,970 $ 3,526 $ 3,773
Net income 227 262 434 480
Dividends on Class A
Subordinate Voting and
Class B Shares (41) (26) (82) (47)
Repurchase of Class A
Subordinate Voting Shares 8 (53) - (98) -
-------------------------------------------------------------------------
Retained earnings, end of
period $ 3,780 $ 4,206 $ 3,780 $ 4,206
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in millions)
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
Note 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided from
(used for):
OPERATING ACTIVITIES
Net income $ 227 $ 262 $ 434 $ 480
Items not involving
current cash flows 256 241 491 438
-------------------------------------------------------------------------
483 503 925 918
Changes in non-cash
operating assets and
liabilities (279) (221) (497) (371)
-------------------------------------------------------------------------
204 282 428 547
INVESTMENT ACTIVITIES
Fixed asset additions (187) (137) (315) (262)
Purchase of subsidiaries 4 (97) - (105) (46)
Increase in investments
and other assets (82) (10) (114) (30)
Proceeds from disposition 19 12 25 27
-------------------------------------------------------------------------
(347) (135) (509) (311)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayments of debt (16) (5) (83) (61)
Issues of debt 27 54 20 77
Issues of Class A
Subordinate Voting Shares - 19 - 23
Repurchase of Class A
Subordinate Voting Shares (134) - (247) -
Dividends (40) (26) (81) (47)
-------------------------------------------------------------------------
(163) 42 (391) (8)
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash and
cash equivalents (6) 91 38 120
-------------------------------------------------------------------------
Net (decrease) increase in
cash and cash equivalents
during the period (312) 280 (434) 348
Cash and cash equivalents,
beginning of period 2,832 1,953 2,954 1,885
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 2,520 $ 2,233 $ 2,520 $ 2,233
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars in millions)
June 30, December 31,
Note 2008 2007
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 2,520 $ 2,954
Accounts receivable 4,484 3,981
Inventories 1,861 1,681
Prepaid expenses and other 223 154
-------------------------------------------------------------------------
9,088 8,770
-------------------------------------------------------------------------
Investments 3 260 280
Fixed assets, net 4,313 4,307
Goodwill 4 1,269 1,237
Future tax assets 296 280
Other assets 531 469
-------------------------------------------------------------------------
$ 15,757 $ 15,343
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness $ 111 $ 89
Accounts payable 3,853 3,492
Accrued salaries and wages 554 544
Other accrued liabilities 5 1,018 911
Income taxes payable 58 248
Long-term debt due within one year 304 374
-------------------------------------------------------------------------
5,898 5,658
-------------------------------------------------------------------------
Deferred revenue 50 60
Long-term debt 339 337
Other long-term liabilities 406 394
Future tax liabilities 247 252
-------------------------------------------------------------------------
6,940 6,701
-------------------------------------------------------------------------
Shareholders' equity
Capital stock 8
Class A Subordinate Voting Shares
(issued: 111,860,233; December 31, 2007
- 115,344,184) 3,597 3,708
Class B Shares
(convertible into Class A Subordinate
Voting Shares)
(issued: 726,829) - -
Contributed surplus 9 58 58
Retained earnings 3,780 3,526
Accumulated other comprehensive income 10 1,382 1,350
-------------------------------------------------------------------------
8,817 8,642
-------------------------------------------------------------------------
$ 15,757 $ 15,343
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars and all tabular amounts in millions unless
otherwise noted)
-------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Magna
International Inc. and its subsidiaries (collectively "Magna" or the
"Company") have been prepared in United States dollars following
Canadian generally accepted accounting principles ("GAAP") with
respect to the preparation of interim financial information.
Accordingly, they do not include all the information and footnotes as
required in the preparation of annual financial statements and should
be read in conjunction with the December 31, 2007 audited
consolidated financial statements and notes included in the Company's
2007 Annual Report. These interim consolidated financial statements
have been prepared using the same accounting policies as the
December 31, 2007 annual consolidated financial statements, except
the Company prospectively adopted the new Canadian Institute of
Chartered Accountants Handbook Section 3031, "Inventories", with no
restatement of prior periods. The adoption of these recommendations
had no material impact on the interim consolidated financial
statements.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring adjustments, necessary to present fairly the
financial position at June 30, 2008 and the results of operations and
cash flows for the three-month and six-month periods ended June 30,
2008 and 2007.
2. IMPAIRMENT CHARGES
During the second quarter of 2008, the Company recorded asset
impairments of $9 million ($7 million after tax) relating to certain
assets in the United States and the United Kingdom.
During the second quarter of 2007, the Company recorded an asset
impairment of $22 million ($14 million after tax) relating to
specific assets at a powertrain facility in the United States.
3. INVESTMENTS
At June 30, 2008, the Company held Canadian third party asset-backed
commercial paper ("ABCP') with a face value of Cdn$134 million. When
acquired, these investments were rated R1 (High) by Dominion Bond
Rating Service ("DBRS"), which was the highest credit rating issued
for commercial paper. These investments did not settle at the
scheduled maturity during the third quarter of 2007 due to ABCP
market liquidity issues, and as a result the Company reclassified its
ABCP to long-term investments from cash and cash equivalents. At
June 30, 2008, the carrying value of this investment was Cdn$104
million (December 31, 2007 - Cdn$121 million), which was based on a
valuation technique estimating the fair value from the perspective of
a market participant. Refer to note 9 of the Company's 2007 audited
consolidated financial statements for more information regarding the
significant estimates and assumptions incorporated into the valuation
of our ABCP.
During the first quarter of 2008, the Company recorded a $17 million
impairment charge due to a widening of the spread between the
anticipated return on the restructuring notes (the "Notes") that are
expected to continue performing and current market rates for
instruments of comparable credit quality, term and structure. The
widening of the spread during the first quarter of 2008 was primarily
due to:
- the anticipated downgrade of the Notes' credit quality by DBRS.
The proposed restructuring plan now anticipates that the Notes
will be rated AA as compared to AAA at December 31, 2007; and
- the widening of market credit spreads as a result of deterioration
in credit markets during the quarter.
The Company did not record an adjustment to the carrying value of
its investment during the second quarter of 2008, however,
continuing uncertainties regarding the value of the assets which
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 the Company's investment in ABCP,
which could impact the Company's earnings.
4. ACQUISITIONS
On May 30, 2008, Magna acquired a facility from Ogihara America
Corporation. The facility in Birmingham, Alabama manufactures major
exterior and structural welded assemblies for sales to various
customers, including Mercedes-Benz.
On June 16th, 2008, Magna was the successful bidder to acquire a
substantial portion of the exteriors business and related assets from
Plastech Engineered Product Inc., in a Chapter 11 sale out of
bankruptcy. The acquired business supplies parts to various
customers, including Chrysler, Ford and General Motors in the United
States and Canada.
The total consideration for these acquisitions was $99 million,
consisting of $97 million paid in cash and $2 million of assumed
debt. The excess purchase price over the book value of assets
acquired and liabilities assumed was $18 million.
The purchase price allocations for these acquisitions are preliminary
and adjustments to the allocations may occur as a result of obtaining
more information regarding asset valuations. On a preliminary basis,
an allocation of the excess purchase price over the book value of
assets acquired and liabilities assumed has been made to fixed
assets, goodwill, and intangible assets.
5. WARRANTY
The following is a continuity of the Company's warranty accruals:
2008 2007
---------------------------------------------------------------------
Balance, beginning of period $ 103 $ 94
Expense, net 10 3
Settlements (11) (6)
Acquisition - 1
Foreign exchange and other 3 1
---------------------------------------------------------------------
Balance, March 31, 105 93
(Income) expense, net (17) 8
Settlements 4 (7)
Foreign exchange and other 1 9
---------------------------------------------------------------------
Balance, June 30 $ 93 $ 103
---------------------------------------------------------------------
---------------------------------------------------------------------
6. EMPLOYEE FUTURE BENEFIT PLANS
The Company recorded employee future benefit expenses as follows:
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Defined benefit pension plans
and other $ 2 $ 5 $ 7 $ 11
Termination and long service
arrangements 7 4 16 10
Retirement medical benefits
plan 4 4 7 6
---------------------------------------------------------------------
$ 13 $ 13 $ 30 $ 27
---------------------------------------------------------------------
---------------------------------------------------------------------
7. STOCK BASED COMPENSATION
(a) Incentive Stock Option Plan
The following is a continuity schedule of options outstanding (number
of options in the table below are expressed in whole numbers):
2008 2007
-------------------------------- --------------------------------
Options outstanding Options outstanding
--------------------- ---------------------
Number of Number of
options options
Number of Exercise exercis- Number of Exercise exercis-