AURORA, ON, Nov. 4 /CNW/ - Magna International Inc. (TSX: MG.A; NYSE:
MGA) today reported financial results for the third quarter and nine months
ended September 30, 2008.
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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2008 2007 2008 2007
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Sales $ 5,533 $ 6,077 $ 18,868 $ 19,231
Operating (loss) income $ (112) $ 267 $ 493 $ 949
Net (loss) income $ (215) $ 155 $ 219 $ 635
Diluted (loss) earnings
per share $ (1.93) $ 1.38 $ 1.92 $ 5.69
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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 SEPTEMBER 30, 2008
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We posted sales of $5.5 billion for the third quarter ended September 30,
2008, a decrease of 9% over the third quarter of 2007. This lower sales level
was a result of decreases in our North American production sales and complete
vehicle assembly sales, offset in part by increases in our European and Rest
of World production sales and our tooling, engineering and other sales.
During the third quarter of 2008, our North American average dollar
content per vehicle remained essentially unchanged while our European average
dollar content per vehicle increased by 10%, each compared to the third
quarter of 2007. In addition, North American and European vehicle production
declined 18% and 8%, respectively, each compared to the third quarter of 2007.
Complete vehicle assembly sales decreased 20% to $687 million for the
third quarter of 2008 compared to $859 million for the third quarter of 2007,
while complete vehicle assembly volumes declined 40% to 25,231 units compared
to the third quarter of 2007.
During the third quarter of 2008, operating loss was $112 million, net
loss was $215 million and diluted loss per share was $1.93, decreases of
$379 million, $370 million and $3.31, respectively, each compared to the third
quarter of 2007.
During the quarter ended September 30, 2008, we recorded a number of
unusual items, including impairment charges associated with long-lived assets
and future tax assets, restructuring charges, and a foreign currency gain. The
aggregate net charge for unusual items totalled $234 million. On a per share
basis, the aggregate net charge for unusual items totalled $2.10.
During the third quarter ended September 30, 2008, we generated cash from
operations of $285 million before changes in non cash operating assets and
liabilities, and invested $35 million in non cash operating assets and
liabilities. Total investment activities for the third quarter of 2008 were
$236 million, including $150 million in fixed asset additions, $4 million in
acquisition costs, and $82 million increase in other assets.
No shares were repurchased during the third quarter of 2008 pursuant to
the terms of our normal course issuer bid.
NINE MONTHS ENDED SEPTEMBER 30, 2008
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We posted sales of $18.9 billion for the nine months ended September 30,
2008, a decrease of 2% over the nine months ended September 30, 2007. This
lower sales level was a result of decreases in our North American production
sales and complete vehicle assembly sales, offset in part by increases in our
European and Rest of World production sales and our tooling, engineering and
other sales.
During the nine months ended September 30, 2008, North American and
European average dollar content per vehicle increased 2% and 18%,
respectively, each over the comparable nine-month period in 2007. During the
nine months ended September 30, 2008, North American and European vehicle
production declined 14% and 3%, respectively, each over the comparable
nine-month period in 2007.
Complete vehicle assembly sales decreased 7% to $2.827 billion for the
nine months ended September 30, 2008 compared to $3.027 billion for the nine
months ended September 30, 2007, while complete vehicle assembly volumes
declined 31% to 108,503 units compared to the first nine months of 2007.
During the nine months ended September 30, 2008, operating income was
$493 million, net income was $219 million and diluted earnings per share was
$1.92, decreases of $456 million, $416 million and $3.77, respectively, each
compared to the third quarter of 2007.
During the nine months ended September 30, 2008, we generated cash from
operations of $1.21 billion before changes in non cash operating assets and
liabilities, and invested $532 million in non cash operating assets and
liabilities. Total investment activities for the first nine months of 2008
were $770 million, including $465 million in fixed asset additions,
$109 million to purchase subsidiaries, and $196 million increase in
investments and other assets.
During the nine months ended September 30, 2008, we purchased for
cancellation 3.5 million Class A Subordinate Voting Shares for cash
consideration of $245 million, pursuant to terms of our normal course issuer
bid program.
A more detailed discussion of our consolidated financial results for the
third quarter and nine months ended September 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.
Don Walker, Magna's co-CEO commented, "As a result of the extremely
challenging conditions of the automotive industry in North America, including
weakening automotive sales and vehicle production, it is necessary and prudent
that we undertake further restructuring actions. None the less, we continue to
invest in new technologies and programs with our customers for Magna's
long-term growth and profitability that will benefit our customers, employees
and shareholders in the years ahead."
DIVIDENDS
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Our Board of Directors yesterday declared a quarterly dividend with
respect to our outstanding Class A Subordinate Voting Shares and Class B
shares for the quarter ended September 30, 2008. The dividend of U.S.$0.18 per
share is payable on December 15, 2008 to shareholders of record on
November 28, 2008.
Vincent J. Galifi, our Executive Vice President and Chief Financial
Officer said, "During the third quarter, the auto industry downturn worsened
in North America and spread to Western Europe. These factors took their toll
on our third quarter financial results, and conditions are not expected to
improve meaningfully in the short term. Across Magna, we are reviewing all
uses of cash with an eye to maintaining our strong financial position in light
of the turmoil currently facing many automotive participants. Our Board's
decision to adjust our dividend as a result of our reduction in profitability
and uncertainty about the timing of an industry recovery in our traditional
markets reflects this view."
2008 OUTLOOK
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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 12.8 million units in North
America and approximately 14.9 million units in Europe. Consequently, we
expect consolidated sales to be between $23.2 billion and $24.3 billion for
full year 2008. Full year 2008 average dollar content per vehicle is expected
to be between $835 and $860 in North America and between $475 and $495 in
Europe. We expect full year 2008 complete vehicle assembly sales to be between
$3.25 billion and $3.45 billion.
In addition, we expect that full year 2008 spending for fixed assets will
be in the range of $700 million to $750 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 80,000 employees in 243 manufacturing operations
and 63 product development and engineering centres in 24 countries.
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We will hold a conference call for interested analysts and shareholders
to discuss our third quarter results on Tuesday, November 4, 2008 at
8:30 a.m. EST. The conference call will be chaired by Vincent J. Galifi,
Executive Vice-President and Chief Financial Officer. The number to use
for this call is 1-800-894-8917. The number for overseas callers is
1-212-231-2901. Please call in 10 minutes prior to the call. We will also
webcast the conference call at www.magna.com. The slide presentation
accompanying the conference call will be available on our website Tuesday
morning prior to the call.
For further information, please contact Louis Tonelli, Vice-President,
Investor Relations at 905-726-7035.
For teleconferencing questions, please contact Karin Kaminski at
905-726-7103.
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FORWARD-LOOKING STATEMENTS
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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, the impact of: 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; the termination or non-renewal by our customers of any
material contracts; our ability to offset increases in the cost of
commodities, such as steel and resins, as well as energy prices; fluctuations
in relative currency values; our ability to offset price concessions demanded
by our customers; our dependence on outsourcing by our customers; our ability
to compete with suppliers with operations in low cost countries; changes in
our mix of earnings between jurisdictions with lower tax rates and those with
higher tax rates, as well as our ability to fully benefit tax losses; other
potential tax exposures; the financial distress of some of our suppliers and
customers; the inability of our customers to meet their financial obligations
to us; our ability to fully recover pre-production expenses; warranty and
recall costs; 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; the risk that the growth prospects expected to be realized in Russia
and other markets may not be fully realized, may take longer to realize than
expected or may not be realized at all; work stoppages and labour relations
disputes; changes in laws and governmental regulations; costs associated with
compliance with environmental laws and regulations; potential conflicts of
interest involving our indirect controlling shareholder, the Stronach Trust;
and other factors set out in our Annual Information Form filed with securities
commissions in Canada and our annual report on Form 40-F filed with the United
States Securities and Exchange Commission, and subsequent filings. In
evaluating forward-looking statements, readers should specifically consider
the various factors which could cause actual events or results to differ
materially from those indicated by such forward-looking statements. Unless
otherwise required by applicable securities laws, we do not intend, nor do we
undertake any obligation, to update or revise any forward-looking statements
to reflect subsequent information, events, results or circumstances or
otherwise.
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For further information about Magna, please see our website at
www.magna.com. Copies of financial data and other publicly filed
documents are available through the internet on the Canadian Securities
Administrators' System for Electronic Document Analysis and Retrieval
(SEDAR) which can be accessed at www.sedar.com and on the United States
Securities and Exchange Commission's Electronic Data Gathering, Analysis
and Retrieval System (EDGAR) which can be accessed at www.sec.gov
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MAGNA INTERNATIONAL INC.
Management's Discussion and Analysis of Results of Operations and
Financial Position
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All amounts in this Management's Discussion and Analysis of Results of
Operations and Financial Position ("MD&A") are in U.S. dollars and all tabular
amounts are in millions of U.S. dollars, except per share figures and average
dollar content per vehicle, which are in U.S. dollars, unless otherwise noted.
When we use the terms "we", "us", "our" or "Magna", we are referring to Magna
International Inc. and its subsidiaries and jointly controlled entities,
unless the context otherwise requires.
This MD&A should be read in conjunction with the unaudited interim
consolidated financial statements for the three months and nine months ended
September 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 nine months ended
September 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 November 3, 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 September 30, 2008, we had 243
manufacturing divisions and 63 product development and engineering centres in
24 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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During the third quarter of 2008, we witnessed a significant decline in
North American vehicle production volumes due to a drop in consumer demand for
automobiles primarily as a result of:
- high oil prices;
- falling equity and home values;
- the global credit crisis and the lack of credit availability;
- higher unemployment;
- negative economic trends;
- falling consumer confidence; and
- related factors.
Conditions in the North American auto industry continued to be extremely
difficult. In the third quarter of 2008 U.S. vehicle sales continued to
weaken, and consequently North American auto production declined 18% from the
third quarter of 2007. In North America the Detroit 3 fared even worse with
vehicle production declining 25%. We also expect that fourth quarter vehicle
production in North America will be similar to the third quarter of 2007, with
anticipated production of approximately 3.0 million units, a decline of 19%
from the fourth quarter of 2007.
The economic woes and credit crisis that have impacted the North American
economy have spread globally. In Western Europe, the automotive outlook has
deteriorated rapidly, with declines in vehicle sales and vehicle production
volumes. Third quarter vehicle production declined 8% compared to the third
quarter of 2007, and we expect that fourth quarter vehicle production will be
approximately 3.2 million units, a decrease of 19% from the fourth quarter of
2007.
Based on these negative economic and other factors, during the third
quarter of 2008 we recorded long-lived asset impairment charges of
$258 million, related primarily to our powertrain, and interior and exterior
systems operations in the United States and Canada as discussed in the
"Unusual Items" section below. We also recorded a $123 million charge to
establish valuation allowances against all future tax assets in the United
States as discussed in the "Unusual Items" section below.
Due in part to the economic conditions in our traditional markets,
particularly North America, we have been consolidating, moving, closing and/or
selling operating facilities to improve our capacity utilization and
manufacturing footprint. During 2008, we have closed and/or sold facilities
and expect to close additional facilities in North America and Western Europe.
In addition, we have restructured a number of facilities to operate at
reduced capacity as a result of lower customer assembly volumes. Each
operating unit is currently reviewing all discretionary spending to lower
operating costs, and capital spending is being delayed, reduced or eliminated
to the extent possible. Despite these efforts, we expect to incur additional
restructuring and rationalization charges in the range of approximately
$70 million to $80 million related to activities that were initiated during
2008.
Over the past 15 years we have diversified our geographic sales and
manufacturing footprint to reduce our dependency on the North American market
for our consolidated sales and profits. We have succeeded in these efforts
largely as a result of diversification in Western Europe and we intend to
continue to grow our manufacturing presence in new markets, including Asia and
Eastern Europe, particularly in Russia. In the third quarter of 2008, Rest of
World production sales grew 43% compared to the third quarter of 2007.
Notwithstanding the above, our financial condition remains strong, with
net cash of $1.7 billion and unused committed credit facilities of
$1.9 billion at the end of the third quarter. We expect that this will help us
withstand the severe economic downturn we are currently facing and allow us to
continue investing for the future, including investments in innovation and
making selective acquisitions that improve or complement our core business. We
also believe our strong financial condition may enable us to win takeover
business from financially and operationally weaker suppliers in the market.
Finally, OJSC Russian Machines' ("Russian Machines") participation in the
arrangements it entered into with the Stronach Trust in connection with its
September 2007 strategic investment in Magna has terminated. Among other
things, Russian Machines no longer has any interest in the 20 million Class A
Subordinate Voting Shares purchased in 2007 nor any interest in M Unicar Inc.,
the holding company formed to hold the Magna shares of the Stronach Trust,
Russian Machines and certain members of Magna's management.
FINANCIAL RESULTS SUMMARY
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During the third quarter of 2008, we posted sales of $5.5 billion, a
decrease of 9% from the third quarter of 2007. This lower sales level was a
result of decreases in our North American production sales and complete
vehicle assembly sales, offset in part by increases in our European and Rest
of World production sales and tooling, engineering and other sales. Comparing
the third quarter of 2008 to the third quarter of 2007:
- North American average dollar content per vehicle remained
essentially unchanged, while vehicle production declined 18%;
- European average dollar content per vehicle increased 10%, while
vehicle production declined 8%; and
- Complete vehicle assembly sales decreased 20% to $687 million from
$859 million and complete vehicle assembly volumes declined 40%.
During the third quarter of 2008, we incurred an operating loss of
$112 million compared to operating income of $267 million for the third
quarter of 2007. Excluding the unusual items recorded in the third quarters of
2008 and 2007, as discussed in the "Unusual Items" section below, operating
income for the third quarter of 2008 decreased $210 million or 86%. The
decrease in operating income was primarily due to:
- decreased margins earned as a result of significantly lower
production volumes, in particular on many high content programs in
North America;
- an additional impairment of our investments in asset-backed
commercial paper ("ABCP"), as discussed in the "Cash Resources"
section below;
- accelerated amortization of deferred wage buydown assets at a
powertrain systems facility in the United States;
- increased commodity costs;
- decreased margins earned on lower volumes for certain assembly
programs;
- operational inefficiencies and other costs at certain facilities;
- downsizing costs primarily in North America;
- lower interest income; and
- incremental customer price concessions.
These factors were partially offset by:
- lower incentive compensation;
- an increase in reported U.S. dollar operating income due to the
strengthening of the euro and Canadian dollar, each against the
U.S. dollar;
- productivity improvements at certain divisions;
- additional margins earned on the launch of new programs during or
subsequent to the third quarter of 2007; and
- the benefit of restructuring activities during or subsequent to the
third quarter of 2007.
During the third quarter of 2008, we incurred a net loss of $215 million
compared to net income of $155 million for the third quarter of 2007.
Excluding the unusual items recorded in the third quarters of 2008 and 2007,
as discussed in the "Unusual Items" section below, net income for the third
quarter of 2008 decreased $151 million or 89%. The decrease in net income was
as a result of the decrease in operating income partially offset by lower
income taxes.
During the third quarter of 2008, our diluted loss per share was $1.93
compared to diluted earnings per share of $1.38 for the third quarter of 2007.
Excluding the unusual items recorded in the third quarters of 2008 and 2007,
as discussed in the "Unusual Items" section below, diluted earnings per share
for the third quarter of 2008 decreased $1.34 or 89%. The decrease in diluted
earnings per share is as a result of the decrease in net income offset in part
by a decrease in the weighted average number of diluted shares outstanding.
The decrease in the weighted average number of diluted shares outstanding was
primarily due to a reduction in the number of diluted shares associated with
stock options, debentures and restricted stock, since such shares were
anti-dilutive in the third quarter of 2008.
UNUSUAL ITEMS
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During the three months and nine months ended September 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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Third Quarter
Impairment
charges(1) $ (258) $ (223) $ (2.00) - - -
Restructuring
charges(1) (4) (4) (0.04) $ (8) $ (5) $ (0.05)
Foreign currency
gain(2) 116 116 1.04 7 7 0.06
Valuation
allowance on
future tax
assets(3) - (123) (1.10) - - -
Future tax
charge(3) - - - - (40) (0.35)
Sale of facility(4) - - - (12) (7) (0.06)
Sale of property(4) - - - 36 30 0.27
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Total third quarter
unusual items (146) (234) (2.10) 23 (15) (0.13)
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Second Quarter
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
unusual items (9) (7) (0.06) (36) (24) (0.21)
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Total year to date
unusual items $ (155) $ (241) $ (2.11) $ (13) $ (39) $ (0.35)
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(1) Restructuring and Impairment Charges
During the first nine months of 2008 and 2007, we recorded impairment
charges as follows:
2008 2007
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Operating Net Operating Net
Income Income Income Income
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Third Quarter
North America $ 258 $ 223 $ - $ -
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Second Quarter
North America 5 3 22 14
Europe 4 4 - -
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Total second quarter
impairment charges 9 7 22 14
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Total year to date
impairment charges $ 267 $ 230 $ 22 $ 14
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(a) For the nine months ended September 30, 2008
Historically, we completed our annual goodwill and long-lived
asset impairment analyses in the fourth quarter of each year.
However, as a result of the significant and accelerated declines
in vehicle production volumes primarily in North America, we
reviewed goodwill and long-lived assets for impairment during the
third quarter of 2008.
As a result, during the third quarter of 2008 we recorded long-
lived asset impairment charges of $258 million, related primarily
to our powertrain, and interior and exterior systems operations
in the United States and Canada. At our powertrain operations,
particularly a facility in Syracuse, New York, asset impairment
charges of $186 million ($166 million after tax) were recorded
primarily as a result of the following factors:
- a dramatic market shift away from truck programs, in
particular four wheel drive pick-up trucks and SUVs;
- excess die-casting, machining and assembly capacity; and
- historical losses that are projected to continue throughout our
business planning period.
At our interiors and exteriors operations, we recorded
$65 million ($52 million after tax) of asset impairment charges
primarily as a result of the following factors:
- significantly lower volumes on certain pick-up truck and SUV
programs;
- the loss of certain replacement business;
- capacity utilization that is not sufficient to support the
current overhead structure; and
- historical losses that are projected to continue throughout our
business planning period.
During the second quarter of 2008, we recorded a $5 million asset
impairment related to specific assets at a seating systems
facility that supplied complete seats to Chrysler's minivan
facility in St. Louis. In Europe, we recorded a $4 million asset
impairment related to specific assets at an interior systems
facility that was disposed of during the third quarter of 2008.
In addition to the impairment charges recorded above, during the
third quarter of 2008 we incurred restructuring and
rationalization costs of $4 million related to the closure of our
seating systems facility in St. Louis.
(b) For the nine months ended September 30, 2007
During the second quarter of 2007, we recorded an asset
impairment of $22 million ($14 million after tax) relating to
specific assets at our powertrain facility in Syracuse, New York.
During the third quarter of 2007, we incurred restructuring and
rationalization charges of $8 million related to three facilities
in North America, and during the second quarter of 2007, we
incurred charges of $10 million related to two facilities in
North America and $4 million related to one facility in Europe
(2) Foreign Currency Gains
In the normal course of business, we review our cash investment and
tax planning strategies, including where such funds are invested. As
a result of these reviews, during the third quarters of 2008 and 2007
we repatriated funds from Europe and as a result recorded foreign
currency gains of $116 million and $7 million, respectively.
(3) Income Taxes
(a) For the nine months ended September 30, 2008
During the third quarter of 2008, we recorded a $123 million
charge to establish valuation allowances against all of our
future tax assets in the United States.
Accounting standards require that we assess whether valuation
allowances should be established against our future income tax
assets based on the consideration of all available evidence using
a "more likely than not" standard. The factors we use to assess
the likelihood of realization are our past history of earnings,
forecast of future taxable income, and available tax planning
strategies that could be implemented to realize the future tax
assets. The valuation allowances were required in the United
States based on:
- historical consolidated losses at our U.S. operations that are
expected to continue in the near-term;
- the accelerated deterioration of near-term automotive market
conditions in the United States; and
- significant and inherent uncertainty as to the timing of when
we would be able to generate the necessary level of earnings to
recover these future tax assets.
(b) For the nine months ended September 30, 2007
During 2007, we recorded a $40 million charge to future income
tax expense as a result of an alternative minimum tax that was
introduced in Mexico.
(4) Other Unusual Items
During the third quarter of 2007, we entered into an agreement to
sell one underperforming exterior systems facility in Europe and as a
result, we incurred a loss on disposition of the facility of
$12 million. Also during the third quarter of 2007, we disposed of
land and building in the United Kingdom and recorded a gain on
disposal of $36 million.
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
third quarter ended September 30, 2008, except that:
- consumer demand for automobiles in our traditional markets has
dropped more rapidly than anticipated as a result of negative
economic trends, the global credit crisis and related factors;
- production volumes of our largest North American and European
customers have fallen more rapidly than previously anticipated and
these volume reductions are expected to negatively impact our results
for the remainder of 2008 and all of 2009;
- the financial condition of several of our largest customers appears
to be deteriorating more quickly than anticipated due to the impact
of negative economic and industry trends as well as credit ratings
downgrades and the overall impact of the credit crisis. As the
financial condition of our customers deteriorates, we face
intensified credit risks, which could adversely impact our
profitability and financial condition;
- prices of some steels, resins, paints/chemicals and other raw
materials and commodities have recently moderated, as have oil and
gas prices;
- our financial results in recent quarters benefitted from the
increasing relative values of the euro, British pound and Canadian
dollar in relation to the U.S. dollar in which we report our results.
Subsequent to quarter end, these currencies have declined
significantly in value relative to the U.S. dollar, which could
impact our profitability and financial condition; and
- while we continue to have positive relations with Russian Machines
and its affiliates, including the GAZ Group which is Russia's second
largest automobile manufacturer, it is too early to determine whether
Russian Machines' exit from the arrangements with the Stronach Trust
will have any impact on our ability to execute our growth strategy in
Russia.
RESULTS OF OPERATIONS
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Average Foreign Exchange
For the three months For the nine months
ended September 30, ended September 30,
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2008 2007 Change 2008 2007 Change
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1 Canadian dollar equals
U.S. dollars 0.960 0.957 - 0.982 0.908 + 8%
1 euro equals U.S. dollars 1.501 1.374 + 9% 1.521 1.345 + 13%
1 British pound equals
U.S. dollars 1.890 2.020 - 7% 1.946 1.987 - 2%
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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 changes in these foreign exchange rates for the three
months and nine months ended September 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, impacts reported results.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
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Sales
For the three months
ended September 30,
--------------------
2008 2007 Change
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Vehicle Production Volumes (millions of units)
North America 2.917 3.558 - 18%
Europe 3.229 3.499 - 8%
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Average Dollar Content Per Vehicle
North America $ 860 $ 862 -
Europe $ 528 $ 479 + 10%
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Sales
External Production
North America $ 2,510 $ 3,068 - 18%
Europe 1,706 1,675 + 2%
Rest of World 143 100 + 43%
Complete Vehicle Assembly 687 859 - 20%
Tooling, Engineering and Other 487 375 + 30%
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Total Sales $ 5,533 $ 6,077 - 9%
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External Production Sales - North America
External production sales in North America decreased 18% or $558 million
to $2.5 billion for the third quarter of 2008 compared to $3.1 billion for the
third quarter of 2007. This decrease in production sales reflects an 18%
decrease in North American vehicle production volumes and a slight decline in
our North American average dollar content per vehicle. More importantly,
during the third quarter of 2008 our largest customers in North America
continued to reduce vehicle production volumes compared to the third quarter
of 2007. While North American vehicle production volumes declined 18% in the
third quarter of 2008 compared to the third quarter of 2007, Ford and Chrysler
vehicle production declined 33% and 32%, respectively.
Our average dollar content per vehicle declined to $860 for the third
quarter of 2008 compared to $862 for the third quarter of 2007, primarily as a
result of:
- the impact of lower production and/or content on certain programs,
including:
- GM's full-size pickups and SUVs;
- the Ford F-Series SuperDuty;
- the Ford Edge and Lincoln MKX;
- the Dodge Nitro;
- the Ford Expedition and Lincoln Navigator;
- the Chevrolet Equinox, Pontiac Torrent and Suzuki XL7; and
- the Ford Explorer and Mercury Mountaineer;
- lower Dodge Ram and Ford F-Series production volumes in part as a
result of the change-over to the next generation of vehicles in the
third quarter of 2008 and the related ramp-up period;
- programs that ended production during or subsequent to the third
quarter of 2007, including the Chrysler Pacifica; and
- incremental customer price concessions.
These factors were partially offset by:
- the launch of new programs during or subsequent to the third quarter
of 2007, including:
- the Ford Flex;
- the Dodge Journey;
- the Mazda 6;
- the Dodge Grand Caravan, Chrysler Town & Country and Volkswagen
Routan;
- the Chevrolet Malibu; and
- the Cadillac CTS;
- acquisitions completed subsequent to the third quarter of 2007,
including:
- a substantial portion of Plastech Engineered Products Inc.'s
("Plastech") exteriors business; and
- a stamping and sub-assembly facility in Birmingham, Alabama from
Ogihara America Corporation ("Ogihara") and
- increased production and/or content on certain programs, including:
- the Saturn Outlook, Buick Enclave and GMC Acadia; and
- the Chevrolet Cobalt and Pontiac Pursuit.
External Production Sales - Europe
External production sales in Europe increased 2% or $31 million to
$1.706 billion for the third quarter of 2008 compared to $1.675 billion for
the third quarter of 2007. This increase in production sales reflects a 10%
increase in our European average dollar content per vehicle partially offset
by an 8% decrease in European vehicle production volumes for the third quarter
of 2008, each as compared to the third quarter of 2007.
Our average dollar content per vehicle grew by 10% or $49 to $528 for the
third quarter of 2008 compared to $479 for the third 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 MINI Clubman; and
- the smart fortwo; and
- the launch of new programs during or subsequent to the third quarter
of 2007, including;
- the Volkswagen Tiguan;
- the Jaguar XF; and
- the Audi Q5.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including the BMW X3;
- the sale of certain facilities during or subsequent to the third
quarter of 2007;
- programs that ended production during or subsequent to the third
quarter of 2007, including the Chrysler Voyager; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in Rest of World increased 43% or $43 million to
$143 million for the third quarter of 2008 compared to $100 million for the
third quarter of 2007. The increase in production sales is primarily as a
result of:
- the launch of new programs during or subsequent to the third 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.
These factors were partially offset by a decrease in reported U.S. dollar
sales as a result of the weakening of the Korean Won 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 September 30,
--------------------
2008 2007 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales $ 687 $ 859 - 20%
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Complete Vehicle Assembly Volumes (Units)
Full-Costed:
BMW X3, Mercedes-Benz G-Class, and
Saab 9(3) Convertible 18,974 27,542 - 31%
Value-Added:
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep Commander 6,257 14,413 - 57%
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25,231 41,955 - 40%
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Complete vehicle assembly sales decreased 20% or $172 million to
$687 million for the third quarter of 2008 compared to $859 million for the
third quarter of 2007 while assembly volumes decreased 40% or 16,724 units.
The decrease in complete vehicle assembly sales was primarily as a result of:
- a decrease in assembly volumes for the BMW X3, Saab 9(3) Convertible,
Chrysler 300, Jeep Commander and Grand Cherokee; and
- the end of production of the Chrysler Voyager at our Graz assembly
facility in the fourth quarter of 2007.
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 increased 30% or $112 million to $487
million for the third quarter of 2008 compared to $375 million for the third
quarter of 2007.
In the third quarter of 2008 the major programs for which we recorded
tooling, engineering and other sales were:
- the Lincoln MKS;
- the Cadillac BRX and Saab 9-4X;
- the Mercedes-Benz M-Class;
- the Mazda 6;
- the BMW Z4;
- the Dodge Ram; and
- the Opel Insignia.
In the third quarter of 2007, the major programs for which we recorded
tooling, engineering and other sales were:
- the Ford F-Series SuperDuty;
- the Audi A4;
- the Dodge Grand Caravan and Chrysler Town & Country;
- GM's full-size pickups; and
- the Ford Flex.
In addition, tooling, engineering and other sales benefited from the
strengthening of the euro against the U.S. dollar.
Gross Margin
Gross margin decreased 25% or $198 million to $600 million for the third
quarter of 2008 compared to $798 million for the third quarter of 2007 and
gross margin as a percentage of total sales decreased to 10.8% compared to
13.1%. The unusual items discussed previously in the "Unusual Items" section
negatively impacted gross margin as a percent of total sales by 0.1% in both
the third quarter of 2008 and 2007. Excluding these unusual items, the 2.3%
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, in particular on many high content programs in
North America;
- accelerated amortization of deferred wage buydown assets at a
powertrain systems facility in the United States;
- operational inefficiencies and other costs at certain facilities, in
particular at certain powertrain and exterior systems facilities in
North America;
- costs incurred in preparation for upcoming launches;
- an increase in tooling and other sales that earn low or no margins;
- increased commodity costs; and
- incremental customer price concessions.
These factors were partially offset by:
- the decrease in complete vehicle assembly sales which has a lower
gross margin than our consolidated average;
- productivity and efficiency improvements at certain facilities;
- lower employee profit sharing; and
- the benefit of restructuring activities during or subsequent to the
third quarter of 2007.
Depreciation and Amortization
Depreciation and amortization costs decreased 1% or $3 million to
$217 million for the third quarter of 2008 compared to $220 million for the
third quarter of 2007. Excluding the unusual items discussed previously in the
"Unusual Items" section, depreciation and amortization remained unchanged at
$217 million. Depreciation and amortization increased due to the strengthening
of the euro against the U.S. dollar for the third quarter of 2008 compared to
the third quarter of 2007. Excluding the effect of foreign exchange,
depreciation and amortization decreased primarily as a result of:
- the sale or disposition of certain facilities subsequent to the third
quarter of 2007; and
- the write-down of certain assets during or subsequent to the third
quarter of 2007.
These factors were partially offset by:
- acquisitions completed subsequent to the third quarter of 2007
including:
- the Ogihara acquisition; and
- the acquisition of a substantial portion of Plastech's exteriors
business.
Selling, General and Administrative ("SG&A")
SG&A expenses as a percentage of sales decreased to 4.6% for the third
quarter of 2008 compared to 5.4% for the third quarter of 2007. SG&A expenses
decreased 23% or $77 million to $253 million for the third quarter of 2008
compared to $330 million for the third quarter of 2007. Excluding the unusual
items discussed previously in the "Unusual Items" section, SG&A expenses
increased by $9 million primarily as a result of:
- net foreign exchange losses incurred during the third quarter of 2008
compared to net foreign exchange gains recorded in the third quarter
of 2007;
- a $24 million write-down of our investments in ABCP as discussed in
the "Cash Resources" section below, compared to a $7 million write-
down in the third quarter or 2007;
- an increase in reported U.S. dollar SG&A due to the strengthening of
the euro against the U.S.
