EXHIBIT 99
PRESS RELEASE - DECOMA INTERNATIONAL INC.
Decoma announces record results for third quarter of 2002
Net income up 74% in the quarter and 43% for first nine months
CONCORD, ON, Nov. 5 /CNW/ - Decoma International Inc. (TSX:DEC.A;
NASDAQ:DECA) today announced financial results for the third quarter and nine
months ended September 30, 2002.
<<
Financial Highlights
--------------------
Three Months Nine Months
Ended September 30 Ended September 30
(U.S.$ millions
except per share
figures) 2002 2001 % 2002 2001 %
(restated)(*) + (-) (restated)(*) + (-)
Sales $465.5 $420.0 11% $1,528.5 $1,349.5 13%
Operating
income $ 36.1 $ 24.9 45% $ 131.0 $ 104.9 25%
Net income $ 18.6 $ 10.7 74% $ 69.9 $ 48.9 43%
Diluted
earnings
per share $ 0.21 $ 0.13 62% $ 0.78 $ 0.60 30%
Weighted
average
diluted
shares
outstanding
(millions) 98.4 97.8 1% 98.3 88.2 11%
(*) Restated for new accounting recommendations regarding foreign
currency gains and losses. See Note 3 to the unaudited interim
consolidated financial statements.
Commenting on the above results, Al Power, Decoma's President and Chief
Executive Officer said: "The results for the third quarter were especially
strong for our North American business segment as efforts and programs
implemented in the past years are continuing to produce record results. In
Europe, continued focus on best practice activities and on improving
operational efficiencies remain top priorities of Executive Management as
sales growth within our European operations will accelerate in late 2003 and
2004 with the launch of a number of new programs."
Results of Operations
---------------------
Total sales were up 11% to a record $465.5 million in the third quarter
and 13% for the nine months ended September 30, 2002. Sales growth in the
third quarter came in a period where vehicle production volumes were up 11% in
North America and European vehicle production volumes were up 2%. Content per
vehicle in the third quarter of 2002 increased 5% to $81 in North America and
increased 3% to $34 in Europe. The increased sales and content in North
America were driven by increased volume on high content vehicles, the
Autosystems acquisition, new programs, takeover business that launched earlier
in 2002, partially offset by lower Mexican sales. The increased sales and
content growth in Europe were driven by an increase in BMW Mini sales in the
United Kingdom and a strengthening in both the Euro and the British Pound
against the U.S. Dollar.
Operating income in the third quarter of 2002 increased 45% to
$36.1 million, up from $24.9 million in the same period last year. The
increase in operating income is the result of strong performance in our North
American business segment driven by continued strength in our top content
programs. Strong North American results more than offset the negative impact
of costs incurred to support future European sales growth and the
establishment of new European production facilities. The Merplas facility
continued to reduce its operating losses, however, the pace of improvement in
operating losses is likely to be reduced until additional core programs can be
secured for this facility.
Operating income for the nine month period ended September 30, 2002
increased 25% to $131.0 million, compared to $104.9 million for the same
period in 2001.
Net income for the third quarter ended September 30, 2002 increased 74%
to $18.6 million ($0.21 per diluted share), compared to $10.7 million
($0.13 per diluted share) for the comparable period in 2001. This increase in
net income for the third quarter of 2002 is primarily attributable to higher
operating income, lower interest costs and a reduction in the Company's
effective tax rate. Net income for the nine month period ended September 30,
2002 increased 43% to $69.9 million ($0.78 per diluted share) compared to
$48.9 million ($0.60 per diluted share) for the comparable period in 2001.
During the third quarter of 2002, cash generated from operations before
changes in non-cash working capital increased 19% to $41.5 million compared to
$34.9 million for the three months ended September 30, 2001. Capital spending
in the third quarter of 2002 for fixed asset additions was $18.8 million.
Quarterly Dividend
------------------
At its meeting today, Decoma's Board of Directors declared a dividend in
respect of the third quarter of 2002 of U.S. $0.06 per share on Class A
Subordinate Voting and Class B Shares payable on December 16, 2002 to
shareholders of record on November 29, 2002. This dividend represents a 20%
increase.
Outlook
-------
Commenting on the balance of 2002, Randy Smallbone, Executive Vice
President and Chief Financial Officer of Decoma said: "We believe that the
balance of 2002 should meet our expectations. Canadian OEM labour issues have
been settled without a strike and North American customer orders continue to
firm up for the balance of the year. In Europe, we anticipate that vehicle
volumes will experience some weakness and we will continue to see the impact
of costs associated with the launch of new business in Europe in 2003 and
2004. However, with continued focus on operating improvements and prudent
financial management we expect to achieve our consolidated profit targets for
2002."
Fourth Quarter 2002
For the fourth quarter of 2002, the Company has assumed North American
light vehicle production volumes of approximately 3.9 million units. The
Company has assumed Western European vehicle production volumes of 4.0 million
units.
North American content per vehicle for the fourth quarter of 2002 is
expected to be in the range of $84 to $88 compared to $80 for the fourth
quarter of 2001. European content per vehicle is expected to approximate $29
to $31 compared to $31 for the fourth quarter of 2001. Based on these
assumptions, the Company expects its fourth quarter sales to range from
$490 million to $540 million, compared to actual sales of $466.4 million in
the fourth quarter of 2001.
Diluted earnings per share for the fourth quarter of 2002 is expected to
be in the range of $0.22 to $0.28.
Full Year 2002
For 2002, the Company has assumed that North American light vehicle
production volumes will be approximately 16.3 million units, an increase of 5%
from vehicle production volumes in 2001. The Company has assumed Western
European vehicle production volumes of 16.2 million units, a decline of 2%
from vehicle production volumes in 2001.
North American content per vehicle for 2002 is expected to be in the
range of $84 to $85 compared to $76 for 2001. European content per vehicle for
2002 is expected to be approximately $30 compared to full year 2001 content
per vehicle of $29. Based on these assumptions, the Company expects its full
year 2002 sales to range between $2,020 million to $2,070 million, compared to
actual 2001 sales of $1,815.9 million.
Diluted earnings per share for 2002 is expected to be in the range of
$0.99 to $1.06. Diluted earnings per share, excluding other income from the
sale of a non-core North American division in the first quarter of 2002 and
the write down of deferred preproduction expenditures at Merplas in the second
quarter of 2002, is expected to be in the range of $1.04 to $1.11.
Forward Looking Information
---------------------------
This press release contains "forward looking statements" within the
meaning of applicable securities legislation. Such statements involve
important risks and uncertainties that may cause actual results or anticipated
events to be materially different from those expressed or implied herein.
These factors include, but are not limited to, risks relating to the
automotive industry, pricing concessions and cost absorptions, reliance on
major OEM customers, production volumes and product mix, currency exposure,
environmental matters, new facilities, trade and labour relations,
technological developments by the Company's competitors, government and
regulatory policies, changes in the competitive environment in which the
Company operates and the Company's ability to raise necessary financing. In
this regard, readers are referred to the Company's Annual Information Form for
the year ended December 31, 2001, filed with the Canadian securities
commissions and as an annual report on Form 40-F with the United States
Securities and Exchange Commission, and subsequent public filings, including
the MD&A for the year ended December 31, 2001, contained in the 2001 Annual
Report. The Company disclaims any intention and undertakes no obligation to
update or revise any forward looking statements to reflect subsequent
information, events or circumstances or otherwise.
About the Company
-----------------
Decoma designs, engineers and manufactures automotive exterior components
and systems which include fascias (bumpers), front and rear end modules,
plastic body panels, roof modules, exterior trim components, sealing and
greenhouse systems and lighting components for cars and light trucks
(including sport utility vehicles and mini-vans). Decoma has approximately
14,000 employees in 41 manufacturing, engineering and product development
facilities in Canada, the United States, Mexico, Germany, Belgium, England,
Japan, France and the Czech Republic.
Conference Call
---------------
-------------------------------------------------------------------------
Decoma management will hold a conference call to discuss the results for
the third quarter of 2002 on Wednesday, November 6, 2002 at
9:30 a.m. EST. The dial-in numbers for the conference call are
(416) 641-6448 (local) or (877) 331-7860 for out of town callers with
call-in required 10 minutes prior to the start of the conference call.
The conference call will be recorded and copies of the recording will be
made available by request. The conference call will also be available by
live webcast at www.newswire.ca/webcast and will be available for a
period of 90 days.
-------------------------------------------------------------------------
Readers are asked to refer to the Management's Discussion and Analysis of
Results of Operations and Financial Position ("MD&A") attached to this release
for a more detailed discussion of the third quarter of 2002.
DECOMA INTERNATIONAL INC.
50 Casmir Court
Concord, Ontario
Canada L4K 4J5
Tel: 905-669-2888
Fax: 905-669-5075
DECOMA INTERNATIONAL INC.
Consolidated Balance Sheets
(Unaudited)
-------------------------------------------------------------------------
As at As at
September December
30, 31,
(U.S. dollars in thousands) 2002 2001
-------------------------------------------------------------------------
ASSETS
-------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 83,997 $ 94,271
Accounts receivable 296,598 270,961
Inventories 206,084 187,014
Prepaid expenses and other 16,984 16,568
-------------------------------------------------------------------------
603,663 568,814
-------------------------------------------------------------------------
Investments 17,361 16,909
-------------------------------------------------------------------------
Fixed assets, net 489,315 491,774
-------------------------------------------------------------------------
Goodwill, net (note 3) 61,087 71,516
-------------------------------------------------------------------------
Future tax assets 6,561 9,942
-------------------------------------------------------------------------
Other assets 11,647 10,204
-------------------------------------------------------------------------
$1,189,634 $1,169,159
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------
Current liabilities:
Bank indebtedness (note 9(b)) $ 88,444 $ 159,959
Accounts payable 194,662 178,162
Accrued salaries and wages 53,990 42,983
Other accrued liabilities 56,171 38,896
Income taxes payable 4,545 9,734
Long-term debt due within one year 6,644 9,566
Debt due to Magna within one year (note 9(c)) 71,734 76,008
Series 1, 2 and 3 Convertible Series Preferred
Shares, held by Magna (note 9(a)) 95,075 -
-------------------------------------------------------------------------
571,265 515,308
-------------------------------------------------------------------------
Long-term debt 9,434 17,942
-------------------------------------------------------------------------
Long-term debt due to Magna (note 9(c)) 98,021 88,524
-------------------------------------------------------------------------
Series 4 and 5 Convertible Series Preferred
Shares, held by Magna (note 9(a)) 113,529 199,956
-------------------------------------------------------------------------
Other long-term liabilities 4,587 4,287
-------------------------------------------------------------------------
Future tax liabilities 48,601 46,036
-------------------------------------------------------------------------
Shareholders' equity:
Convertible Series Preferred Shares (note 8) 20,490 26,071
Class A Subordinate Voting Shares (note 8) 172,488 167,825
Class B Shares (note 8) 30,594 30,594
Retained earnings (note 3) 93,736 49,768
Currency translation adjustment 26,889 22,848
-------------------------------------------------------------------------
344,197 297,106
-------------------------------------------------------------------------
$1,189,634 $1,169,159
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Income and Retained Earnings
(Unaudited)
-------------------------------------------------------------------------
Three Month Periods Nine Month Periods
Ended September 30, Ended September 30,
-------------------------------------------------------------------------
(U.S. dollars in 2002 2001 2002 2001
thousands, except (restated - (restated -
per share figures) see note 3) see note 3)
-------------------------------------------------------------------------
Sales $ 465,518 $ 420,021 $1,528,485 $1,349,490
-------------------------------------------------------------------------
Cost of goods sold 371,693 338,799 1,213,115 1,081,611
Depreciation and
amortization 19,806 20,377 58,438 60,057
Selling, general and
administrative
(note 4) 32,541 29,456 98,066 82,929
Affiliation and social
fees (note 4) 5,366 6,489 19,573 20,018
Other charge (note 3) - - 8,301 -
-------------------------------------------------------------------------
Operating income 36,112 24,900 130,992 104,875
Equity (income) loss 305 86 (474) (74)
Interest expense, net 3,065 4,290 9,474 15,104
Amortization of
discount on
Convertible Series
Preferred Shares 2,028 2,257 6,413 7,146
Other income, net
(note 10) - - (3,874) -
-------------------------------------------------------------------------
Income before income
taxes and minority
interest 30,714 18,267 119,453 82,699
Income taxes 12,092 7,567 49,523 33,004
Minority interest - - - 843
-------------------------------------------------------------------------
Net income 18,622 10,700 69,930 48,852
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financing charges on
Convertible Series
Preferred Shares and
Subordinated
Debentures, net
of taxes (1,137) (1,704) (3,495) (5,020)
-------------------------------------------------------------------------
Net income attributable
to Class A Subordinate
Voting and Class B
Shares 17,485 8,996 66,435 43,832
Retained earnings,
beginning of period 79,654 30,875 49,768 -
Dividends on Class A
Subordinate Voting
and Class B Shares (3,403) (3,378) (10,163) (7,495)
Cumulative adjustment
for change in
accounting policy for
foreign currency
translation (note 3) - - - 156
Adjustment for change
in accounting policy
for goodwill (note 3) - - (12,304) -
-------------------------------------------------------------------------
Retained earnings,
end of period 93,736 36,493 93,736 36,493
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per Class A
Subordinate Voting
or Class B Share
Basic $ 0.26 $ 0.13 $ 0.98 $ 0.75
Diluted $ 0.21 $ 0.13 $ 0.78 $ 0.60
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of
Class A Subordinate
Voting and Class B
Shares outstanding
(in millions)
Basic 67.9 67.6 67.7 58.1
Diluted 98.4 97.8 98.3 88.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------------------------------------------
Three Month Periods Nine Month Periods
Ended September 30, Ended September 30,
-------------------------------------------------------------------------
2002 2001 2002 2001
(U.S. dollars in (restated - (restated -
thousands) see note 3) see note 3)
-------------------------------------------------------------------------
Cash provided from
(used for):
OPERATING ACTIVITIES
Net income $ 18,622 $ 10,700 $ 69,930 $ 48,852
Items not involving
current cash flows 22,862 24,206 73,981 73,131
-------------------------------------------------------------------------
41,484 34,906 143,911 121,983
Changes in non-cash
working capital (7,186) (9,635) 3,541 (19,383)
-------------------------------------------------------------------------
34,298 25,271 147,452 102,600
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Fixed asset additions (18,762) (17,707) (50,376) (48,962)
Business acquisitions
(note 12) - (12,538) (2,584) (20,319)
Less remaining purchase
price payable - 4,730 - 9,917
Increase in investments
and other assets (1,770) (1,894) (4,196) (3,185)
Proceeds from
disposition of fixed
and other assets 173 24 225 1,447
Proceeds from
disposition of
operating division,
net (note 10) 340 - 5,736 -
-------------------------------------------------------------------------
(20,019) (27,385) (51,195) (61,102)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in
bank indebtedness 15,251 18,648 (75,372) (7,934)
Repayments of long
term debt, net (361) (3,716) (10,483) (10,949)
Repayments of debt
due to Magna - (433) (7,836) (85,345)
Repayments of debenture
interest obligation - (1,120) - (10,633)
Repayment of
Subordinated
Debentures - - - (25,824)
Issuances of Class A
Subordinate Voting
Shares, net (note 8) 4,554 70 4,663 111,201
Dividends on
Convertible Series
Preferred Shares (3,031) (3,083) (9,076) (8,103)
Dividends on Class A
Subordinate Voting
and Class B Shares (3,403) (3,378) (10,163) (9,220)
-------------------------------------------------------------------------
13,010 6,988 (108,267) (46,807)
-------------------------------------------------------------------------
Effect of exchange
rate changes on cash
and cash equivalents (832) 704 1,736 (18)
-------------------------------------------------------------------------
Net increase (decrease)
in cash and cash
equivalents during
the period 26,457 5,578 (10,274) (5,327)
Cash and cash
equivalents, beginning
of period 57,540 39,136 94,271 50,041
-------------------------------------------------------------------------
Cash and cash
equivalents, end
of period $ 83,997 $ 44,714 $ 83,997 $ 44,714
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
DECOMA INTERNATIONAL INC.
Notes to Consolidated Financial Statements
Three and nine month periods ended September 30, 2002 and 2001
(Unaudited)
-------------------------------------------------------------------------
1. The Company
Decoma International Inc. ("Decoma" or the "Company") is a full
service supplier of exterior vehicle appearance systems for the
world's automotive industry. Decoma designs, engineers and
manufactures automotive exterior components and systems which include
fascias (bumpers), front and rear end modules, plastic body panels,
roof modules, exterior trim components, sealing and greenhouse
systems and lighting components for cars and light trucks (including
sport utility vehicles and mini vans).
2. Basis of Presentation
The unaudited interim consolidated financial statements of Decoma
have been prepared in U.S. dollars in accordance with Canadian
generally accepted accounting principles ("GAAP"), except that
certain disclosures required for annual financial statements have not
been included. Accordingly, the unaudited interim consolidated
financial statements should be read in conjunction with the Company's
audited consolidated financial statements for the year ended
December 31, 2001 (the Company's "annual financial statements") which
were included in the Company's annual report to shareholders for the
year then ended.
The unaudited interim consolidated financial statements have been
prepared on a basis that is consistent with the accounting policies
set out in the Company's annual financial statements, except as
described in note 3.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring items, necessary to present fairly the financial
position of the Company as at September 30, 2002 and the results of
its operations and cash flows for the three and nine month periods
ended September 30, 2002 and 2001.
3. Accounting Policy Changes
Goodwill and Other Intangible Assets
In September 2001, The Canadian Institute of Chartered Accountants
("CICA") issued Handbook Section 1581 "Business Combinations" ("CICA
1581") and Handbook Section 3062, "Goodwill and Other Intangible
Assets" ("CICA 3062").
CICA 1581 requires that all business combinations initiated after
June 30, 2001 be accounted for using the purchase method of
accounting. In addition, CICA 1581 provides new criteria to determine
when acquired intangible assets should be recognized separately from
goodwill.
CICA 3062 requires the application of the non-amortization and
impairment rules for existing goodwill and intangible assets that
meet the criteria for indefinite life. In accordance with CICA 3062,
effective January 1, 2002, the Company has applied the
recommendations contained therein prospectively, without restatement
of any comparable periods.
Upon adoption of the recommendations, the Company ceased recording
amortization of existing goodwill. The Company does not have any
intangible assets meeting the non-amortization criteria of CICA 3062.
In accordance with CICA 3062, the Company has provided the following
information related to the impact of the non-amortization method for
goodwill:
---------------------------------------------------------------------
Three Month Nine Month
Period Ended Period Ended
September September
30, 30,
---------------------------------------------------------------------
(U.S. dollars in thousands,
except per share figures) 2001 2001
---------------------------------------------------------------------
Net income, as reported $ 10,700 $ 48,852
Restatement to eliminate goodwill
amortization 1,051 3,179
---------------------------------------------------------------------
Adjusted net income $ 11,751 $ 52,031
---------------------------------------------------------------------
---------------------------------------------------------------------
Adjusted earnings per Class A Subordinate
Voting or Class B Share
Basic $ 0.15 $ 0.81
Diluted $ 0.14 $ 0.64
---------------------------------------------------------------------
---------------------------------------------------------------------
Prior to the current standard coming into effect, goodwill impairment
was assessed based on the estimated future undiscounted cash flows
for the business to which the goodwill relates. Under CICA 3062,
goodwill impairment is assessed based on a comparison of the fair
value of a reporting unit to the underlying carrying value of the
reporting unit's net assets, including goodwill. Under CICA 3062,
upon initial adoption of the goodwill valuation standards, any write-
down of goodwill that is a result of an identified impairment is
charged to opening retained earnings at January 1, 2002. Thereafter,
goodwill must be assessed for impairment on an annual basis and any
required write-down would be charged against earnings.
As required by CICA 3062, the Company completed its initial review of
goodwill impairment in June of 2002. Based on this review, the
Company recorded a write-down of $12.3 million related to its United
Kingdom reporting unit. This write-down was charged against
January 1, 2002 opening retained earnings.
As part of its assessment of goodwill impairment, the Company also
reviewed the recoverability of deferred preproduction expenditures at
its Merplas United Kingdom facility. As a result of this review,
$8.3 million of deferred preproduction expenditures were written off
as a charge against income in the second quarter of 2002.
Foreign Currency Translation
In December 2001, the CICA amended Handbook Section 1650 "Foreign
Currency Translation" ("CICA 1650"). Under CICA 1650, unrealized
translation gains and losses arising on long-term monetary
liabilities denominated in a foreign currency are no longer deferred
and amortized over the period to maturity. Instead, such gains and
losses are recognized in income as incurred.
The Company adopted the amendments to CICA 1650 effective January 1,
2002 with retroactive restatement to January 1, 2001. As a result of
applying the amendments to CICA 1650, the Company increased opening
retained earnings as at January 1, 2001 by $0.2 million.
Net income was reduced by $0.2 million, basic earnings per share were
reduced by $0.01, diluted earnings per share were unchanged and items
not involving current cash flows were increased by $0.2 million, in
each case for the three month period ended September 30, 2001.
For the nine month period ended September 30, 2001, net income was
reduced by $0.3 million, basic earnings per share were reduced by
$0.01, diluted earnings per share were reduced by $0.01 and items not
involving current cash flows were increased by $0.3 million.
Selling, general and administrative expenses are net of earnings
(losses) resulting from foreign exchange of:
---------------------------------------------------------------------
Three Month Periods Nine Month Periods
Ended Ended
September 30, September 30,
---------------------------------------------------------------------
(U.S. dollars in
thousands) 2002 2001 2002 2001
---------------------------------------------------------------------
Foreign exchange
income (loss) $ (106) $ 1,192 $ 19 $ 546
---------------------------------------------------------------------
---------------------------------------------------------------------
Stock-Based Compensation
In November 2001, the CICA issued Handbook Section 3870 "Stock-Based
Compensation and Other Stock-Based Payments" ("CICA 3870"). CICA 3870
requires that all stock-based awards granted to non-employees must be
accounted for at fair value. The new standard also encourages, but
does not require, the use of the fair value method for stock-based
compensation paid to employees and to directors, in their capacity as
a director, that requires settlement in stock. For all employee and
director option plans not accounted for at fair value, pro forma
earnings disclosure showing the impact of fair value accounting is
required. The new standard only applies to awards granted after
January 1, 2002.
The Company's current stock option plan requires its employees and
directors to pay the option exercise price in order to obtain stock.
The Company has elected to continue accounting for employee stock
options using the intrinsic value method with pro forma earnings
disclosure showing the impact of stock options on earnings had the
Company accounted for all employee and director stock options at fair
value. The Company has elected to provide pro forma disclosures for
all options outstanding rather than only for those granted after
January 1, 2002 (see note 8). The adoption of CICA 3870 had no effect
on the Company's reported earnings for the three and nine month
periods ended September 30, 2002.
4. Affiliation and Social Fees
The Company is party to an affiliation agreement with Magna
International Inc. ("Magna") that provides for the payment by Decoma
of an affiliation fee.
On June 25, 2002, the Company entered into an agreement with Magna to
amend the terms of its existing affiliation agreement. The amended
agreement, which became effective August 1, 2002, provides for a term
of nine years and five months, expiring on December 31, 2011, and
thereafter is renewable on a year to year basis at the parties'
option.
Affiliation fees payable under the amended agreement were reduced to
1% of Decoma's consolidated net sales (as defined in the agreement)
from the 1.5% that previously applied. In addition, the amended
agreement provides for a fee holiday on 100% of consolidated net
sales derived from future business acquisitions in the calendar year
of the acquisition and 50% of consolidated net sales derived from
future business acquisitions in the first calendar year following the
year of acquisition. The amended agreement also provided Decoma with
a credit of 0.25% of Decoma's consolidated net sales for the period
from January 1, 2002 to July 31, 2002 and a credit equal to 1.5% of
2001 consolidated net sales derived from the 2001 acquisition of
Autosystems and 50% of 1.25% of January 1, 2002 to July 31, 2002
consolidated net sales derived from Autosystems.
The Company also pays Magna a social fee based on a specified
percentage of consolidated pre-tax profits. Such fee represents a
contribution to social and charitable programs coordinated by Magna
on behalf of Magna and its affiliated companies, including Decoma.
Decoma's corporate constitution specifies that the Company will
allocate a maximum of two percent of its profit before tax to support
social and charitable activities.
In addition to affiliation and social fees payable to Magna, the
Company pays Magna a negotiated amount for certain management and
administrative services. Subsequent to the three month period ended
September 30, 2001, the Company began reporting amounts paid to Magna
for management and administrative services in selling, general and
administrative expenses ("SG&A"). Affiliation and social fees
continue to be shown separately in the consolidated statements of
income. The comparative period amounts have been reclassified to
conform to the current period's presentation. The cost of management
and administrative services provided by Magna and included in SG&A
totalled $0.8 million and $2.6 million in the three and nine month
periods ended September 30, 2002, respectively ($0.9 million and
$2.6 million in the three and nine month periods ended September 30,
2001, respectively).
5. Cyclicality of Operations
Substantially all revenue is derived from sales to the North American
and European facilities of the major automobile manufacturers. The
Company's operations are exposed to the cyclicality inherent in the
automotive industry and to changes in the economic and competitive
environments in which the Company operates. The Company is dependent
on continued relationships with the major automobile manufacturers.
6. Use of Estimates
The preparation of the unaudited interim consolidated financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the
unaudited interim consolidated financial statements and accompanying
notes. Management believes that the estimates utilized in preparing
its unaudited interim consolidated financial statements are
reasonable and prudent; however, actual results could differ from
these estimates.
7. Contingencies
In the ordinary course of business activities, the Company may be
contingently liable for litigation and claims with customers,
suppliers and former employees and for environmental remediation
costs. Management believes that adequate provisions have been
recorded in the accounts where required. Although it is not possible
to estimate the extent of potential costs and losses, if any,
management believes, but can provide no assurance, that the ultimate
resolution of such contingencies would not have a material adverse
effect on the financial position and results of operations of the
Company.
8. Capital Stock
Class and Series of Outstanding Securities
For details concerning the nature of the Company's securities, please
refer to note 11 "Convertible Series Preferred Shares" and note 12
"Capital Stock" of the Company's annual financial statements.
The following table summarizes the outstanding share capital of the
Company:
---------------------------------------------------------------------
Authorized Issued
---------------------------------------------------------------------
Convertible Series Preferred Shares
(Convertible into Class A Subordinate
Voting Shares) 3,500,000 3,500,000
Preferred Shares, issuable in series Unlimited -
Class A Subordinate Voting Shares Unlimited 36,154,299
Class B Shares
(Convertible into Class A Subordinate
Voting Shares) Unlimited 31,909,091
---------------------------------------------------------------------
---------------------------------------------------------------------
During the nine month period ended September 30, 2002, Class A
Subordinate Voting Shares increased by $0.1 million related to 16,000
shares issued as a result of the exercise of stock options and by
$4.6 million related to 451,400 Class A Subordinate Voting Shares
issued to the Decoma employee deferred profit sharing program.
Incentive Stock Options
Information concerning the Company's Incentive Stock Option Plan is
included in note 12 "Capital Stock" of the Company's annual financial
statements. The following is a continuity schedule of options
outstanding:
---------------------------------------------------------------------
Weighted
Average Number of
Exercise Options
Number Price Exercisable
---------------------------------------------------------------------
Outstanding at December 31,
2001 1,796,000 Cdn. $12.02 1,089,000
Granted 435,000 Cdn. $17.53
Exercised (16,000) Cdn. $10.59 (16,000)
Vested 313,000
---------------------------------------------------------------------
Outstanding at September 30,
2002 2,215,000 Cdn. $13.12 1,386,000
---------------------------------------------------------------------
---------------------------------------------------------------------
The maximum number of shares reserved to be issued for stock options
is 4,100,000 Class A Subordinate Voting Shares. The number of
reserved but unoptioned shares at September 30, 2002 is 1,833,750.
The total number of shares issued from exercised stock options, from
the inception date of the plan, is 51,250.
The fair value of stock options is estimated at the grant date using
the Black-Scholes option pricing model using the following weighted
average assumptions for stock options issued in each period indicated
(no stock options were issued during the three month periods ended
September 30, 2002 and 2001):
---------------------------------------------------------------------
Nine Month Periods
Ended
September 30,
---------------------------------------------------------------------
2002 2001
---------------------------------------------------------------------
Risk free interest rate 2.7% 5.2%
Expected dividend yield 1.9% 1.8%
Expected volatility 37% 29%
Expected life of options (years) 5 years 6 years
---------------------------------------------------------------------
---------------------------------------------------------------------
The Black-Scholes option valuation model, as well as other currently
accepted option valuation models, was developed for use in estimating
the fair value of freely tradable options which are fully
transferable and have no vesting restrictions. In addition, this
model requires the input of highly subjective assumptions, including
future stock price volatility and expected time until exercise.
Because the Company's outstanding options have characteristics which
are significantly different from those of traded options, and because
changes in any of the assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of
its stock options.
However, for purposes of pro forma disclosures, the Company's net
income attributable to Class A Subordinate Voting and Class B Shares,
after valuing all stock options currently outstanding for the three
and nine month periods ended September 30, 2002 would have been:
---------------------------------------------------------------------
Three Month Periods Nine Month Periods
Ended September 30, Ended September 30,
---------------------------------------------------------------------
(U.S. dollars in
thousands, except
per share figures) 2002 2001 2002 2001
---------------------------------------------------------------------
Pro forma net
income
attributable to
Class A
Subordinate
Voting and Class
B Shares $ 17,267 $ 8,747 $ 65,619 $ 42,963
---------------------------------------------------------------------
Pro forma earnings
per Class A
Subordinate Voting
or Class B Share
Basic $ 0.25 $ 0.13 $ 0.97 $ 0.74
Diluted $ 0.21 $ 0.13 $ 0.77 $ 0.60
---------------------------------------------------------------------
---------------------------------------------------------------------
Maximum Shares
The following table presents the maximum number of shares that would
be outstanding if all of the outstanding options and Convertible
Series Preferred Shares issued and outstanding as at September 30,
2002 were exercised or converted:
---------------------------------------------------------------------
Number of
Shares
---------------------------------------------------------------------
Class A Subordinate Voting Shares outstanding
at September 30, 2002 36,154,299
Class B Shares outstanding at September 30, 2002 31,909,091
Options to purchase Class A Subordinate Voting Shares 2,215,000
Convertible Series Preferred Shares, convertible
at Cdn. $10.07 per share 14,895,729
Convertible Series Preferred Shares, convertible
at Cdn. $13.20 per share 15,151,516
---------------------------------------------------------------------
100,325,635
---------------------------------------------------------------------
---------------------------------------------------------------------
In addition, the Company has reserved 548,600 Class A Subordinate
Voting Shares for future issuances to the Decoma employee deferred
profit sharing plan.
9. Debt
(a) Convertible Series Preferred Shares
The liability amounts for the Series 1, 2 and 3 Convertible Series
Preferred Shares are presented as current liabilities. The Series 1,
2 and 3 Convertible Series Preferred Shares are retractable by Magna
at their face value of Cdn. $150 million after June 30, 2003. These
shares are also convertible by Magna into the Company's Class A
Subordinate Voting Shares at a fixed conversion price of Cdn. $10.07
per Class A Subordinate Voting Share. The Company's Class A
Subordinate Voting Shares have traded between Cdn. $10.56 and Cdn.
$21.10 over the 52 week period ended October 25, 2002.
The liability amounts for the Series 4 and 5 Convertible Series
Preferred Shares are presented as long-term liabilities as these are
not retractable by Magna before January 1, 2004 and January 1, 2005,
respectively. These shares are also convertible by Magna into the
Company's Class A Subordinate Voting Shares at a fixed conversion
price of Cdn. $13.20 per Class A Subordinate Voting Share.
The Series 1, 2 and 3 Convertible Series Preferred Shares are
redeemable by the Company after July 31, 2003 and the Series 4 and 5
Convertible Series Preferred Shares are redeemable by the Company
after December 31, 2005.
(b) Credit Facility
At September 30, 2002 the Company had lines of credit totaling
$328.1 million. Of this amount, $300 million is represented by an
extendible, revolving credit facility that expires on May 29, 2003,
at which time the Company may request further revolving 364-day
extensions. The unused and available lines of credit at September 30,
2002 were approximately $226.6 million.
(c) Amounts Due to Magna
The Company's debt due to Magna consists of the following:
---------------------------------------------------------------------
September December
30, 31,
(U.S. dollars in thousands) 2002 2001
---------------------------------------------------------------------
Debt denominated in Canadian dollars(i) $ 38,030 $ 37,604
Debt denominated in Euros and
British Pounds(ii) 131,725 126,928
---------------------------------------------------------------------
169,755 164,532
Less due within one year 71,734 76,008
---------------------------------------------------------------------
$ 98,021 $ 88,524
---------------------------------------------------------------------
---------------------------------------------------------------------
Notes:
(i) The debt denominated in Canadian dollars arose on closing of
the Global Exteriors Transaction. This debt initially bore
interest at 7.5% and was repayable in 2001. The interest rate
on this debt was subsequently renegotiated to 4.85% effective
September 4, 2001, 3.1% effective January 1, 2002, 3.6%
effective April 1, 2002, 3.83% effective July 1, 2002 and 3.90%
effective October 1, 2002. The maturity date of this Cdn.
$60 million debt has been extended to December 31, 2002.
(ii) The debt denominated in Euros and British Pounds arose on
closing of the Global Exteriors Transaction. This debt
initially bore interest at 7% to 7.5% and was repayable over
the period to December 31, 2004 with $32.7 million due
October 1, 2002. All debt denominated in British Pounds was
repaid in the nine month period ended September 30, 2002. The
interest rate on the $32.7 million of debt due October 1, 2002
has been renegotiated to 4.29% effective October 1, 2002 and
the maturity date of this debt has been extended to January 1,
2003.
10. Other Income, Net
On March 11, 2002, the Company completed the divestiture of one of
its non-core North American divisions. The division was engaged in
the coating of automotive parts. The Company recorded other income of
$3.9 million related to this transaction, representing the excess of
sale proceeds over the carrying value of the fixed and working
capital assets of this division and direct costs related to the
transaction.
11. Segmented Information
The Company operates in one industry segment, the automotive
exteriors business. As at September 30, 2002, the Company had 23
manufacturing facilities in North America and 11 in Europe. In
addition, the Company had 7 product development and engineering
centres.
The Company's European divisions are managed separately from the
Company's North American divisions as a result of differences in
customer mix and business environment. The Company's internal
financial reports, which are reviewed by executive management
including the Company's President and Chief Executive Officer,
segment divisional results between North America and Europe. This
segmentation recognizes the different geographic business risks faced
by the Company's North American and European divisions, including
vehicle production volumes in North America and Europe, foreign
currency exposure, differences in OEM customer mix, the level of
customer outsourcing and the nature of products and systems
outsourced.
The accounting policies of each segment are consistent with those
used in the preparation of the unaudited interim consolidated
financial statements. Inter-segment sales and transfers are accounted
for at fair market value. The following tables show certain
information with respect to segment disclosures.
---------------------------------------------------------------------
Three Month Period Ended September 30, 2002
---------------------------------------------------------------------
(U.S. dollars in North
thousands) America Europe Corporate Total
---------------------------------------------------------------------
Sales $ 331,098 $ 135,227 $ - $ 466,325
Intersegment sales (205) (602) - (807)
---------------------------------------------------------------------
Sales to external
customers $ 330,893 $ 134,625 $ - $ 465,518
---------------------------------------------------------------------
Depreciation and
amortization $ 14,036 $ 5,770 $ - $ 19,806
---------------------------------------------------------------------
Operating income
(loss) $ 42,133 $ (3,656) $ (2,365) $ 36,112
---------------------------------------------------------------------
Equity loss $ 305 $ - $ - $ 305
---------------------------------------------------------------------
Interest expense
(income), net $ 8,930 $ 4,972 $ (10,837) $ 3,065
---------------------------------------------------------------------
Amortization of
discount on
Convertible Series
Preferred Shares $ - $ - $ 2,028 $ 2,028
---------------------------------------------------------------------
Fixed assets, net $ 351,067 $ 138,248 $ - $ 489,315
---------------------------------------------------------------------
Fixed asset
additions $ 9,596 $ 9,166 $ - $ 18,762
---------------------------------------------------------------------
Goodwill, net $ 44,579 $ 16,508 $ - $ 61,087
---------------------------------------------------------------------
---------------------------------------------------------------------
Three Month Period Ended September 30, 2001
---------------------------------------------------------------------
(U.S. dollars in North
thousands) America Europe Corporate Total
---------------------------------------------------------------------
Sales $ 292,665 $ 128,129 $ - $ 420,794
Intersegment sales (700) (73) - (773)
---------------------------------------------------------------------
Sales to external
customers $ 291,965 $ 128,056 $ - $ 420,021
---------------------------------------------------------------------
Depreciation and
amortization $ 14,289 $ 6,088 $ - $ 20,377
---------------------------------------------------------------------
Operating income
(loss) $ 27,021 $ (776) $ (1,345) $ 24,900
---------------------------------------------------------------------
Equity loss $ 86 $ - $ - $ 86
---------------------------------------------------------------------
Interest expense
(income), net $ 5,606 $ 4,714 $ (6,030) $ 4,290
---------------------------------------------------------------------
Amortization of
discount on
Convertible Series
Preferred Shares $ - $ - $ 2,257 $ 2,257
---------------------------------------------------------------------
Fixed assets, net $ 363,468 $ 134,181 $ - $ 497,649
---------------------------------------------------------------------
Fixed asset
additions $ 11,475 $ 6,232 $ - $ 17,707
---------------------------------------------------------------------
Goodwill, net $ 45,152 $ 28,073 $ - $ 73,225
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine Month Period Ended September 30, 2002
---------------------------------------------------------------------
(U.S. dollars in North
thousands) America Europe Corporate Total
---------------------------------------------------------------------
Sales $1,118,755 $ 411,649 $ - $1,530,404
Intersegment sales (1,280) (639) - (1,919)
---------------------------------------------------------------------
Sales to external
customers $1,117,475 $ 411,010 $ - $1,528,485
---------------------------------------------------------------------
Depreciation and
amortization $ 41,009 $ 17,429 $ - $ 58,438
---------------------------------------------------------------------
Other charge
(note 3) $ - $ 8,301 $ - $ 8,301
---------------------------------------------------------------------
Operating income
(loss) $ 148,779 $ (12,240) $ (5,547) $ 130,992
---------------------------------------------------------------------
Equity income $ (474) $ - $ - $ (474)
---------------------------------------------------------------------
Interest expense
(income), net $ 18,261 $ 15,365 $ (24,152) $ 9,474
---------------------------------------------------------------------
Amortization of
discount on
Convertible Series
Preferred Shares $ - $ - $ 6,413 $ 6,413
---------------------------------------------------------------------
Other income
(note 10) $ (3,874) $ - $ - $ (3,874)
---------------------------------------------------------------------
Fixed assets, net $ 351,067 $ 138,248 $ - $ 489,315
---------------------------------------------------------------------
Fixed asset
additions $ 30,677 $ 19,699 $ - $ 50,376
---------------------------------------------------------------------
Goodwill, net $ 44,579 $ 16,508 $ - $ 61,087
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine Month Period Ended September 30, 2001
---------------------------------------------------------------------
(U.S. dollars in North
thousands) America Europe Corporate Total
---------------------------------------------------------------------
Sales $ 952,333 $ 400,801 $ - $1,353,134
---------------------------------------------------------------------
Intersegment sales (3,571) (73) - (3,644)
---------------------------------------------------------------------
Sales to external
customers $ 948,762 $ 400,728 $ - $1,349,490
---------------------------------------------------------------------
Depreciation and
amortization $ 42,979 $ 17,078 $ - $ 60,057
---------------------------------------------------------------------
Operating income
(loss) $ 104,233 $ 4,476 $ (3,834) $ 104,875
---------------------------------------------------------------------
Equity income $ (74) $ - $ - $ (74)
---------------------------------------------------------------------
Interest expense
(income), net $ 18,994 $ 13,893 $ (17,783) $ 15,104
---------------------------------------------------------------------
Amortization of
discount on
Convertible Series
Preferred Shares $ - $ - $ 7,146 $ 7,146
---------------------------------------------------------------------
Fixed assets, net $ 363,468 $ 134,181 $ - $ 497,649
---------------------------------------------------------------------
Fixed asset
additions $ 35,821 $ 13,141 $ - $ 48,962
---------------------------------------------------------------------
Goodwill, net $ 45,152 $ 28,073 $ - $ 73,225
---------------------------------------------------------------------
---------------------------------------------------------------------
12. Business Acquisition
Decomex
In May 2001, the Company acquired the remaining minority interest in
Decomex Inc. ("Decomex") from Corporacion Activa, S.A. de C.V.
Decomex operates fascia moulding and finishing operations in Mexico.
Total consideration paid in connection with the acquisition amounted
to $7.8 million, which gave rise to goodwill of $0.1 million. The
purchase price was satisfied with cash of $2.6 million and by the
issuance of $5.2 million of prime rate promissory notes, denominated
in Canadian dollars, at par, maturing $2.6 million on May 31, 2002
and $2.6 million on May 31, 2003. Interest on the promissory notes is
payable in Canadian dollars on a quarterly basis.
The acquisition has been accounted for by the purchase method in
these unaudited interim consolidated financial statements from the
date of acquisition.
Autosystems
On September 28, 2001, the Company acquired the lighting components
manufacturing business and related fixed and working capital assets
of Autosystems Manufacturing Inc. ("Autosystems") from the court
appointed receiver and monitor of Autosystems.
Autosystems is an automotive lighting manufacturer located in Ontario
whose principal customers include General Motors Corporation and
Visteon Corporation. Total consideration paid in connection with the
acquisition amounted to $12.3 million after working capital purchase
price adjustments which were finalized in the fourth quarter of 2001.
The acquisition has been accounted for by the purchase method in
these consolidated financial statements from the date of acquisition.
The net effect of the transaction on the Company's consolidated
balance sheet was as follows:
(U.S. dollars in thousands)
---------------------------------------------------------------------
Non-cash working capital $ 2,200
Fixed assets 10,070
---------------------------------------------------------------------
Net assets acquired $ 12,270
---------------------------------------------------------------------
---------------------------------------------------------------------
DECOMA INTERNATIONAL INC.
Management's Discussion and Analysis of Results of Operations and
Financial Position
Three and nine month periods ended September 30, 2002 and 2001
-------------------------------------------------------------------------
All amounts in this Management's Discussion and Analysis of Results of
Operations and Financial Position ("MD&A") are in U.S. dollars unless
otherwise noted. This MD&A should be read in conjunction with the Company's
unaudited interim consolidated financial statements for the three and nine
month periods ended September 30, 2002, included elsewhere herein, and the
Company's consolidated financial statements and MD&A for the year ended
December 31, 2001, each included in the Company's Annual Report to
Shareholders for 2001.
OVERVIEW
North American vehicle production volumes in the first nine months of
2002 were strong relative to expectations at the beginning of the year despite
reduced OEM incentives. North American vehicle production volumes were
12.5 million units for the first nine months of 2002, an increase of 7% over
the first nine months of 2001. North American vehicle production volumes for
the third quarter of 2002 were 3.8 million units, in line with our last
outlook but 11% above vehicle production volumes in the third quarter of 2001.
Vehicle production volumes in the third quarter of 2001 were negatively
impacted by a general industry slowdown which was further exacerbated by the
events of September 11, 2001.
Western European vehicle production volumes were 12.2 million units in
the first nine months of 2002, a decrease of 2% over the first nine months of
2001. Western European vehicle production volumes for the third quarter of
2002 were 3.6 million units, in line with our latest outlook and substantially
unchanged from the third quarter of 2001.
Total sales grew to a third quarter record of $465.5 million in the three
month period ended September 30, 2002, an 11% increase over the comparable
prior year period. Diluted earnings per share were $0.21 for the third quarter
of 2002, an improvement of 62% over diluted earnings per share of $0.13 for
the third quarter of 2001.
The Company's sales and earnings growth was driven by strong performance
in North America. European production sales increased as a result of the ramp
up of the BMW Mini program in the United Kingdom and as a result of the
translation of Euro and British Pound sales into United States dollars.
However, production sales in Germany and Belgium, measured in Euros, declined
as a result of lower vehicle production volumes on certain high content
programs which, in conjunction with costs incurred to support future European
sales growth, has contributed to a decline in European, excluding Merplas,
operating income. Merplas, on the other hand, continued to reduce its
operating losses in the third quarter of 2002.
RESULTS OF OPERATIONS
United Kingdom
Although the Company's consolidated financial results were strong, they
continue to be negatively impacted by the Company's Merplas facility which
continues to incur losses.
Merplas is located in the United Kingdom and supplies the new Jaguar X400
program. The segmented results of operations discussion in this MD&A
separately discloses the results of Merplas from the Company's European
operating segment. Given the magnitude of Merplas' losses over the last
several quarters, it is necessary to separately disclose Merplas in order to
adequately explain the performance of the European operating segment.
Merplas' operating loss, excluding the impact of the deferred
preproduction expenditures write off in the second quarter of 2002, improved
to $3.0 million in the three month period ended September 30, 2002 compared to
$9.0 million, $6.4 million, $5.9 million, $4.0 million and $3.6 million in the
three month periods ended June 30, 2001, September 30, 2001, December 31,
2001, March 31, 2002 and June 30, 2002, respectively. Merplas' operating loss
in the first quarter of 2001 was $2.1 million as production on the facility's
primary program, the Jaguar X400, did not ramp up until the second quarter of
2001.
Decoma executive management has spent additional time and focus on the
progress of implementation of improvement plans and to help identify and
implement further improvement opportunities in Europe and, in particular, at
Merplas. The pace of improvement in Merplas' operating losses is likely to be
reduced in the near term. Continued significant near term improvements in
Merplas' operating losses are unlikely without the launch of additional new
business at this facility. In addition, pricing and volume levels on certain
Ford service part programs currently running at Merplas are expected to be
reduced by Ford over the coming quarters.
Merplas' longer term profitability is dependent on filling the facility's
open capacity. The Merplas facility was built to service the Jaguar Halewood
assembly plant, which assembles the X400, and other Jaguar programs, including
the X100 program, with additional capacity to service other future business
opportunities. Although the X100 fascia program, which was temporarily
outsourced to a Magna facility for most of 2001, was returned to Merplas in
the first quarter of 2002, Merplas production volumes on the Jaguar X400 and
X100 programs continue at levels that are below original estimates. In
addition, although a number of small service part programs are operating at
Merplas, other than the Jaguar business no significant additional production
programs have been secured, at this point in time, to utilize Merplas' open
capacity.
However, certain programs that were outsourced to third parties by Sybex,
the Company's other United Kingdom facility, are being reviewed for relocation
to Merplas. In addition, the Company is actively pursuing new business for the
United Kingdom and is continuing to review the allocation of existing and
future business between Merplas and Sybex to fill open capacity. As well,
Decoma continues to monitor its competitors with production facilities in the
United Kingdom with a view to capitalizing on takeover opportunities if and
when they present themselves.
-------------------------------------------------------------------------
Three Month Periods Ended September 30, 2002 and 2001
Sales
-------------------------------------------------------------------------
Three Month Periods
Ended September 30,
-------------------------
%
2002 2001 Change
-------------------------------------------------------------------------
Vehicle Production Volumes (in millions)
North America 3.8 3.5 11%
Western Europe 3.6 3.5 2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Content Per Vehicle (U.S. dollars)
North America $81 $77 5%
Europe 34 33 3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Production Sales (U.S. dollars in millions)
North America $312.7 $268.9 16%
Europe
Excluding Merplas 114.7 105.7 9%
Merplas 8.7 8.4 4%
Total Europe 123.4 114.1 8%
Global Tooling and Other Sales 29.4 37.0 (21%)
-------------------------------------------------------------------------
Total Sales $465.5 $420.0 11%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America
North American production sales grew by 16% to $312.7 million in the
three month period ended September 30, 2002 from $268.9 million in the
comparable prior year period. This increase was driven by growth in average
North American content per vehicle. North American content per vehicle grew to
approximately $81 compared to $77 for the third quarters of 2002 and 2001,
respectively. The increase in content was driven by the acquisition of
Autosystems on September 28, 2001 which added approximately $5 to North
American content per vehicle; new takeover business including content on the
General Motors 820 C and D (Cadillac Escalade and Denali SUVs), GMT 806
(Escalade EXT) and GMT 800 and 830 (Silverado, Sierra and Suburban) programs;
content on programs that launched during or subsequent to the third quarter of
2001 including the Nissan TK (Altima) and DaimlerChrysler KJ (Jeep Liberty)
programs; increased content and higher volumes on the GMT 250 (Aztek) and
increased content on the Ford U204 (Escape) programs; and strong volumes on
other high content production programs including the DaimlerChrysler LH
(Concorde, Intrepid and 300M) and RS (Minivan), General Motors GMX 210
(Impala) and Ford EN114 (Crown Victoria, Grand Marquis) programs. These
increases were partially offset by lower Mexican sales due to lower production
volumes on both the GMT 805 (Avalanche) program, where comparative period
volumes were strong as General Motors worked to fill its distribution
channels, and on the DaimlerChrysler PT Cruiser program; the disposition of a
non-core North American operating division in the first quarter of 2002; and
the translation of Canadian dollar sales into the Company's U.S. dollar
reporting currency which negatively impacted North American production sales.
The Canadian dollar weakened against the U.S. dollar by 1% for the three month
period ended September 30, 2002 compared to the three month period ended
September 30, 2001.
Increases in North American production sales were also driven by an
increase in vehicle production volumes. Total North American light vehicle
production for the third quarter of 2002 was 3.8 million units representing an
increase of 11% from the 3.5 million vehicles produced in the third quarter of
2001.
Europe
European production sales, excluding Merplas, increased 9% to $114.7
million in the third quarter of 2002 compared to $105.7 million for the third
quarter of 2001. Production sales at Merplas increased to $8.7 million in the
third quarter of 2002 compared to $8.4 million in the third quarter of 2001.
European content per vehicle grew 3% to approximately $34 for the third
quarter of 2002 compared to $33 for the third quarter of 2001. Content growth
was driven by an increase in sales at the Company's Sybex facility in the
United Kingdom as a result of the ramp up of the BMW Mini program. The BMW
Mini has been very well received resulting in strong production volumes.
Content growth was also driven by the translation of Euro and British
Pound sales into the Company's U.S. dollar reporting currency. The average
exchange rate for the Euro and British Pound, each against the U.S. dollar,
increased 10% and 8%, respectively, for the three month period ended September
30, 2002 compared to the three month period ended September 30, 2001. However,
when measured in Euros, sales at the Company's facilities in Germany and
Belgium declined in the third quarter of 2002 over the comparable prior year
period. This decline was driven by lower production volumes on certain high
content programs including the Company's largest European program, the
DaimlerChrysler Mercedes C Class, lower content on the introduction of the new
DaimlerChrysler Mercedes E Class and the cancellation at the beginning of the
third quarter of 2002 of DaimlerChrysler PT Cruiser production in Europe.
Western European vehicle production volumes were substantially unchanged at
3.6 million units for the third quarter of 2002 compared to 3.5 million units
for the third quarter of 2001.
Tooling and Other
Tooling and other sales on a global basis declined 21% to $29.4 million
compared to $37.0 million for the third quarters of 2002 and 2001,
respectively. The decrease in tooling and other sales came primarily in North
America where sales for the third quarter of 2001 included amounts related to
the cancellation of a previously planned refresh of the DaimlerChrysler LH
program. Tooling inventory includes a number of in-progress tooling programs
that have not yet been completed and billed to customers.
Gross Margin
Gross margin as a percentage of total sales increased to 20.2% for the
three month period ended September 30, 2002 compared to 19.3% for the three
month period ended September 30, 2001.
Gross margins were positively affected by contributions from new takeover
business; contributions from programs that launched during or subsequent to
the third quarter of 2001 including the Nissan TK (Altima) and DaimlerChrysler
KJ (Jeep Liberty) programs in North America and the BMW Mini program in
Europe; strong volumes on certain other high content programs in North America
including the DaimlerChrysler LH (Concorde, Intrepid and 300M) and RS
(Minivan), Ford EN114 (Crown Victoria, Grand Marquis) and General Motors GMX
210 (Impala) programs; improved performance at two North American trim related
facilities; reduced losses at Merplas; improved performance at
Carplast/Toptech, one of the Company's German facilities where Audi TT roof
module production recently ended but a number of MAN truck and other programs
continue; and the impact of the Company's ongoing continuous improvement
programs. These improvements were partially offset by costs incurred to
support future European sales growth; the cancellation at the beginning of the
third quarter of 2002 of DaimlerChrysler PT Cruiser production in Europe;
lower production volumes on certain high content programs in Europe including
lower volumes on the Company's largest European program, the DaimlerChrysler
Mercedes C Class; operating inefficiencies and other period costs at a
facility in continental Europe and at a sealing systems facility in Ontario;
further OEM price concessions; and, although contributing to gross margin,
lower gross margin percentages at Autosystems.
Depreciation and Amortization
Depreciation and amortization costs declined to $19.8 million for the
third quarter of 2002 compared to $20.4 million for the third quarter of 2001.
Effective January 1, 2002, Canadian generally accepted accounting
principles ("GAAP") with respect to goodwill changed. As a result, effective
January 1, 2002, the Company ceased recording amortization of goodwill (see
the "Changes in Accounting Policy - Goodwill and Deferred Preproduction
Expenditures" section of this MD&A and note 3 to the Company's unaudited
interim consolidated financial statements included elsewhere herein).
Depreciation and amortization for the three month period ended September 30,
2001 includes goodwill amortization of $1.0 million.
Excluding goodwill amortization, depreciation and amortization was
substantially unchanged. As a percentage of total sales, depreciation and
amortization costs decreased to 4.3% for the third quarter of 2002 compared to
4.9% for the third quarter of 2001.
Selling, General and Administrative ("S,G&A")
S,G&A costs were $32.5 million for the third quarter of 2002, up from
$29.5 million for the third quarter of 2001. This increase reflects additional
S,G&A expense as a result of the Autosystems acquisition, additional costs
associated with Merplas and United Kingdom sales and marketing efforts,
additional management resources and new project costs in Europe, higher
compensation costs for managers with compensation tied to Company profits, an
increase in foreign exchange expenses and increases in sales, marketing,
program management and other costs to support the higher sales levels. As a
percentage of sales, S,G&A was unchanged at 7.0%.
Magna provides certain management and administrative services to the
Company, including specialized legal, environmental, immigration,
administrative, tax, internal audit, treasury, information systems and
employee relations services, in return for a specific amount negotiated
between the Company and Magna. The Company is currently in discussions with
Magna with respect to a formal agreement detailing these arrangements.
Subsequent to September 30, 2001, the Company began reporting these amounts in
S,G&A expense. Previously, these amounts were combined with affiliation and
social fees and reported as a separate line item on the consolidated
statements of income. All comparative period amounts have been reclassified to
conform with the current period's presentation. The cost of management and
administrative services provided by Magna and included in S,G&A was $0.8
million and $0.9 million for the three month periods ended September 30, 2002
and 2001, respectively.
Affiliation and Social Fees
The Company is party to an affiliation agreement with Magna that provides
for the payment by Decoma of an affiliation fee. The affiliation agreement
provides the Company with, amongst other things, certain trade mark rights,
access to Magna's management and to its operating principles and policies,
Tier 1 development assistance, global expansion assistance, vehicle system
integration and modular product strategy assistance, technology development
assistance and human resource management assistance.
As previously disclosed, on June 25, 2002, the Company entered into an
agreement with Magna to amend the terms of its existing affiliation agreement
with Magna. The amended agreement was effective August 1, 2002, provides for a
term of nine years and five months expiring on December 31, 2011 and is
renewable thereafter on a year to year basis at the parties' option.
Affiliation fees payable under the amended agreement were reduced to 1% of
Decoma's consolidated net sales (as defined in the agreement) from the 1.5%
rate that previously applied. At current sales levels, the fee reduction is
expected to result in annualized savings commencing August 1, 2002 of
approximately $10 million. In addition, the amended agreement provides for a
fee holiday on 100% of consolidated net sales derived from future business
acquisitions in the calendar year of the acquisition and 50% of consolidated
net sales derived from future business acquisitions in the first calendar year
following the year of acquisition. The amended agreement also entitled Decoma
to a credit equal to 0.25% of Decoma's consolidated net sales for the period
from January 1, 2002 to July 31, 2002. In addition, Decoma was entitled to a
credit equal to 1.5% of 2001 consolidated net sales derived from the 2001
acquisition of Autosystems and 50% of 1.25% of January 1, 2002 to July 31,
2002 consolidated net sales derived from Autosystems. The value of these
credits through June 2002 was accrued in the second quarter of 2002. The value
of these credits for the month of July was accrued in the third quarter of
2002.
Decoma's corporate constitution specifies that the Company will allocate
a maximum of 2% of its profit before tax to support social and charitable
activities. The Company pays 1.5% of its consolidated pretax profits to Magna
which in turn allocates such amount to social and other charitable programs on
behalf of Magna and its affiliated companies, including Decoma.
The affiliation and social fees payable to Magna for the third quarter of
2002 decreased to $5.4 million from $6.5 million for the comparable prior year
period. The decrease in affiliation and social fees reflects the more
favourable terms of the new affiliation agreement with Magna partially offset
by an increase in affiliation and social fees payable due to the increases in
consolidated net sales and pretax profits on which the affiliation and social
fees are calculated, respectively.
Operating Income
-------------------------------------------------------------------------
Three Month Periods
Ended September 30,
-------------------------
%
(U.S. dollars in millions) 2002 2001 Change
-------------------------------------------------------------------------
Operating Income
North America $42.1 $27.0 56%
Europe
Excluding Merplas (0.6) 5.6
Merplas (3.0) (6.4)
------ ------
Total Europe (3.6) (0.8)
Corporate (2.4) (1.3)
-------------------------------------------------------------------------
Total Operating Income $36.1 $24.9 45%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total operating income grew by 45% to $36.1 million for the third quarter
of 2002 compared to $24.9 million for the third quarter of 2001.
Operating income for the third quarter of 2001, adjusted to eliminate the
impact of goodwill amortization of $1.0 million (see the "Results of
Operations - Three Month Periods Ended September 30, 2002 and 2001 -
Depreciation and Amortization" section of this MD&A for further discussion),
was $25.9 million. Operating income of $36.1 million for the third quarter of
2002 increased by 39% over operating income for the third quarter of 2001 of
$25.9 million, adjusted to eliminate goodwill amortization.
North America
North American operating income increased to $42.1 million for the third
quarter of 2002 from $27.0 million for the third quarter of 2001. This
increase is the result of contributions from new takeover business;
contributions from programs that launched during or subsequent to the third
quarter of 2001 including the Nissan TK (Altima) and DaimlerChrysler KJ (Jeep
Liberty) programs; strong volumes on other high content production programs
including the DaimlerChrysler LH (Concorde, Intrepid and 300M) and RS
(Minivan), Ford EN114 (Crown Victoria and Grand Marquis) and General Motors
GMX 210 (Impala) programs; the acquisition of Autosystems; improved
performance at two trim related facilities; increased contributions as a
result of the Company's ongoing continuous improvement programs; the
elimination of goodwill amortization; and the impact of more favourable terms
under the new affiliation agreement with Magna. These improvements were
partially offset by increased period costs at a sealing systems facility in
Ontario; lower contributions from the Company's Mexican facility due to lower
production volumes on the General Motors GMT 805 (Avalanche) and
DaimlerChrysler PT Cruiser programs; and further OEM price concessions.
Europe
European operating income, excluding Merplas, decreased to a loss of $0.6
million for the third quarter of 2002 compared to income of $5.6 million for
the comparable prior year period. Operating income was negatively impacted by
costs incurred to support future European sales growth including:
- costs associated with various Audi production programs currently
being launched at the Company's Decoform and Prometall facilities
in Germany;
- costs associated with the fourth quarter of 2002 launch of the VW
Group T5 (Transit Van) program at the Company's recently completed
Modultec mould in colour, assembly and sequencing facility in
Germany with painted fascia production to come from the Company's
existing Decoform facility also in Germany;
- costs associated with establishing a moulding, assembly and
sequencing facility in Poland to commence operations in the second
half of 2003 to service the VW Group T5 (Transit Van) and the VW
Group SLW (City Car) Poland production programs;
- costs associated with Magna Steyr's DaimlerChrysler Mercedes E
Class 4 matic assembly program that will launch in the first
quarter of 2003 at a new Decoma assembly and sequencing facility in
Graz, Austria (fascias for this program will be supplied by a third
party);
- costs associated with the construction of a new paint line at the
Company's Belplas facility in Belgium to service, commencing in the
fourth quarter of 2003, a portion of the production volume on the
VW Group's A5 (Golf) program;
- costs associated with various Porsche programs that will launch in
the fourth quarter of 2003 at a new assembly and sequencing
facility to be constructed in Zuffenhausen, Germany with fascia and
related trim product production coming from the Company's existing
Decoform facility and from third parties;
- costs associated with the DaimlerChrysler Mercedes A Class program
that will launch in the third quarter of 2004 at a new assembly and
sequencing facility, Carmodul, in Rastatt, Germany with fascia
production coming from the Company's existing Innoplas facility
also in Germany; and
- additional costs associated with increased United Kingdom sales and
marketing efforts.
European, excluding Merplas, operating income was also negatively
impacted by lower production sales at the Company's facilities in Germany and
Belgium, measured in Euros, due to a decline in production volumes on certain
high content production programs including the DaimlerChrysler Mercedes C
Class; operating inefficiencies and other period costs at a facility in
continental Europe; and the cancellation, at the beginning of the third
quarter of 2002, of production on the DaimlerChrysler PT Cruiser program which
was serviced by the Company's Decoform facility. DaimlerChrysler consolidated
production on this program in Mexico. The Company is currently negotiating the
recovery of cancellation costs in respect of this program. Finally, severance
costs and additional European management resource costs impacted European
operating income.
The above factors were partially offset by:
- improved performance at the Company's Carplast/Toptech operations
in Germany;
- contributions from the launch of the new BMW Mini program at the
Company's Sybex facility in the United Kingdom; and
- the elimination of goodwill amortization and the impact of more
favourable terms under the Company's new affiliation agreement with
Magna.
Merplas generated an operating loss of $3.0 million for the third quarter
of 2002 compared to a loss of $6.4 million for the third quarter of 2001.
Although the loss is significant, Merplas' performance has steadily improved.
The operating losses for the second, third and fourth quarters of 2001 were
$9.0 million, $6.4 million and $5.9 million, respectively, and $4.0 million
and $3.6 million for the first and second quarters of 2002, respectively,
excluding the impact of the deferred preproduction expenditures write off in
the second quarter of 2002. Refer to the "Results of Operations - United
Kingdom" section of this MD&A for further discussion regarding Merplas.
Equity Loss
The loss from equity accounted investments, which includes the Company's
40% share of Bestop, Inc. ("Bestop") and Modular Automotive Systems, LLC,
increased to a loss of $0.3 million for the third quarter of 2002 compared to
a loss of $0.1 million for the third quarter of 2001. The increase is
primarily attributable to closure costs accrued in the current quarter with
respect to one of Bestop's facilities partially offset by the cessation of
goodwill amortization effective January 1, 2002. Refer to the "Changes in
Accounting Policy - Goodwill and Deferred Preproduction Expenditures" section
of this MD&A for further discussion regarding goodwill amortization.
EBITDA
On a global basis, EBITDA, excluding other income, increased 23% to
$55.9 million for the third quarter of 2002 from $45.3 million for the third
quarter of 2001. EBITDA as a percentage of total sales increased to 12.0% for
the third quarter of 2002 from 10.8% for the third quarter 2001.
The North American operating segment generated EBITDA of $56.1 million or
17.0% of North American segment sales for the third quarter of 2002. This
compares favourably to EBITDA of $41.3 million or 14.2% of sales for the third
quarter of 2001.
The European operating segment, excluding Merplas, generated EBITDA of
$4.6 million or 3.6% of European segment sales, excluding Merplas, for the
third quarter of 2002. This compares to EBITDA of $10.6 million or 8.8% of
sales for the third quarter of 2001.
EBITDA at Merplas was a loss of $2.4 million for the third quarter of
2002. The Merplas EBITDA loss was substantially improved over the losses
incurred in the second, third and fourth quarters of 2001 of $8.1 million,
$5.3 million and $4.8 million, respectively, and the first and second quarters
of 2002 of $3.1 million and $2.7 million, respectively. Refer to the "Results
of Operations - United Kingdom" section of this MD&A for further discussion
regarding Merplas.
The Company has presented EBITDA as supplementary information concerning
the cash operating earnings of the Company and because it is a measure that is
widely used by analysts in evaluating the operating performance of companies
in the automotive industry. The Company defines EBITDA as operating income
plus depreciation and amortization plus the write down of deferred
preproduction expenditures based on the respective amounts presented in the
Company's unaudited interim consolidated statements of income included
elsewhere herein. However, EBITDA does not have any standardized meaning under
Canadian GAAP and is therefore unlikely to be comparable to similar measures
presented by other issuers.
Interest Expense
Interest expense for the third quarter of 2002 was $3.1 million compared
to $4.3 million for the third quarter of 2001. Total interest bearing net debt
(including bank indebtedness, long-term debt including current portion, debt
due to Magna including current portion and debenture interest obligation, less
cash and cash equivalents) declined to $190.3 million at September 30, 2002
compared to $226.6 million at June 30, 2001. In addition to debt reduction,
lower market interest rates resulted in reduced interest costs.
Amortization of Discount on Convertible Series Preferred Shares
The Company's amortization of the discount on the portion of the
Convertible Series Preferred Shares classified as debt decreased to
$2.0 million for the third quarter of 2002 from $2.3 million for the third
quarter of 2001. The decrease reflects lower amortization as a result of the
discount on the Series 2 and 3 Convertible Series Preferred Shares being fully
amortized as of July 31, 2001 and 2002, respectively.
Income Taxes
The Company's effective income tax rate for the third quarter of 2002
decreased to 39.4% from 41.4% for the third quarter of 2001. The effective
income tax rate improved over the third quarter of 2001 as a result of reduced
losses at Merplas which are not tax benefited, reductions in Ontario statutory
income tax rates, the cessation of goodwill amortization (see the "Results of
Operations - Three Month Periods Ended September 30, 2002 and 2001 -
Depreciation and Amortization" section of this MD&A for further discussion
regarding goodwill amortization) which was non-deductible for tax and reduced
non-deductible amortization of the discount on Convertible Series Preferred
Shares.
These improvements were partially offset by the utilization in the third
quarter of 2001 of previously unbenefited tax loss carryforwards in Mexico to
shelter Mexican income. The Mexican tax loss carryforwards were fully utilized
in 2001. As a result, Mexican income in the third quarter of 2002 was subject
to a full tax provision.
Cumulative unbenefited tax loss carryforwards in the United Kingdom and
Belgium total approximately $51.0 million and $6.4 million, respectively.
These losses have no expiry date.
Net Income
Net income for the third quarter of 2002 increased 74% to $18.6 million
from $10.7 million for the third quarter of 2001. This increase is primarily
attributable to higher operating income, lower interest costs and a reduction
in the Company's effective tax rate.
Net income for the third quarter of 2001, adjusted to eliminate the after
tax impact of goodwill amortization of $1.1 million (see the "Changes in
Accounting Policy - Goodwill and Deferred Preproduction Expenditures" section
of this MD&A for further discussion), was $11.8 million. Net income of
$18.6 million for the third quarter of 2002 increased by 58% over net income
for the third quarter of 2001 of $11.8 million, after adjustment to eliminate
the after tax impact of goodwill amortization.
Financing Charges
Financing charges, net of income tax recoveries, related to the issuance
of $90 million 9.5% Subordinated Debentures as partial consideration for the
acquisition of Visteon Corporation's 49% minority interest in the Conix Group
(the "Conix Transaction") on October 16, 2000 were $0.7 million in the three
month period ended September 30, 2001. The charge to retained earnings, net of
tax, reflects the accretion to face value of the present value of the
principal portion of the Subordinated Debentures over their term to maturity.
In June and November of 2001, the Subordinated Debentures were repaid.
Accordingly, financing charges related to Subordinated Debentures were nil in
the third quarter of 2002.
The deduction from net income of dividends declared and paid on the
Convertible Series Preferred Shares (net of return of capital) was
substantially unchanged at $1.1 million for the third quarter of 2002 compared
to $1.0 million for the third quarter of 2001.
Diluted Earnings Per Share
Diluted earnings per share for the third quarter of 2002 increased 62% to
$0.21 compared to $0.13 for the third quarter of 2001.
Diluted earnings per share for the third quarter of 2001 was reduced by
$0.01 as a result of goodwill amortization. Diluted earnings per share for the
third quarter of 2002 of $0.21 increased 50% over diluted earnings per share
for the third quarter of 2001 adjusted to eliminate goodwill amortization (see
the "Changes in Accounting Policy - Goodwill and Deferred Preproduction
Expenditures" section of this MD&A for further discussion regarding goodwill
amortization).
The increase in diluted earnings per share is primarily due to the
substantial increase in net income for the third quarter of 2002 compared to
the third quarter of 2001. The weighted average number of diluted Class A
Subordinate Voting and Class B Shares outstanding increased 0.6 million. The
increase is the result of the issuance of 451,400 Class A Subordinate Voting
Shares to the Decoma employee deferred profit sharing program during the third
quarter of 2002 and the issuance of 16,100,000 Class A Subordinate Voting
Shares in June 2001 ("the June 2001 Equity Offering").
Overview for the Nine Month Periods Ended September 30, 2002 and 2001
-------------------------------------------------------------------------
Nine Month Periods
Ended September 30,
-------------------------
%
2002 2001 Change
-------------------------------------------------------------------------
Vehicle Production Volumes (in millions)
North America 12.5 11.6 7%
Western Europe 12.2 12.5 (2%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Content Per Vehicle (U.S. dollars)
North America $84 $75 12%
Europe 30 28 7%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Production Sales (U.S. dollars in millions)
North America $1,041.5 $873.1 19%
Europe
Excluding Merplas 339.9 334.4 2%
Merplas 28.0 16.4 71%
------- -------
Total Europe 367.9 350.8 5%
Global Tooling and Other Sales 119.1 125.6 (5%)
-------------------------------------------------------------------------
Total Sales $1,528.5 $1,349.5 13%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating Income
North America $148.7 $104.2 43%
Europe
Excluding Merplas 6.7 22.0 (70%)
Merplas excluding deferred preproduction
expenditures write off (10.6) (17.5) 39%
Merplas deferred preproduction
expenditures write off (8.3)
------- -------
Total Europe (12.2) 4.5
Corporate (5.5) (3.8)
-------------------------------------------------------------------------
Total Operating Income $131.0 $104.9 25%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales
North America
North American production sales grew by 19% to $1,041.5 million in the
first nine months of 2002 from $873.1 million in the comparable prior year
period. This increase was driven by growth in average North American content
per vehicle and higher vehicle production volumes. North American content per
vehicle grew to approximately $84 compared to $75 for the first nine months of
2002 and 2001, respectively. The increase in content was driven by the
acquisition of Autosystems which added $5 in content per vehicle; new takeover
business; the ramp up of the Ford U152 (Explorer) and other programs which
launched in 2001; and increased volumes on other high content production
programs. These increases were partially offset by the translation of Canadian
dollar sales into the Company's U.S. dollar reporting currency which
negatively impacted North American production sales. The Canadian dollar
weakened against the U.S. dollar by 2% for the nine month period ended
September 30, 2002 compared to the nine month period ended September 30, 2001.
Total North American light vehicle production for the first nine months
of 2002 was 12.5 million units representing an increase of 7% from the
11.6 million vehicles produced in the first nine months of 2001.
Europe
European production sales, excluding Merplas, increased 2% to
$339.9 million in the first nine months of 2002 compared to $334.4 million for
the first nine months of 2001. Production sales at Merplas increased to
$28.0 million compared to $16.4 million in the nine months periods ended
September 30, 2002 and 2001, respectively. European content per vehicle grew
7% to approximately $30 for the first nine months of 2002 compared to $28 for
the first nine months of 2001. Content growth was driven by an increase in
sales at the Company's United Kingdom facilities as a result of the ramp up of
both the BMW Mini program produced at Sybex and the Jaguar X400 program
produced at Merplas and by the translation of Euro and British Pound sales
into the Company's U.S. dollar reporting currency. The average exchange rate
for the Euro and British Pound, each against the U.S. dollar, increased 4% and
3%, respectively, for the nine month period ended September 30, 2002 compared
to the nine month period ended September 30, 2001.
These increases in content were partially offset by lower sales measured
in Euros at the Company's facilities in Germany and Belgium in the first nine
months of 2002 over the comparable prior year period. This decline was driven
by lower vehicle production volumes including lower volumes on certain high
content programs including the DaimlerChrysler Mercedes C Class and Ford
Mondeo programs, lower content on the introduction of the new DaimlerChrysler
Mercedes E Class and the cancellation in the third quarter of 2002 of
DaimlerChrysler PT Cruiser production in Europe. Western European vehicle
production volumes declined 2% to 12.2 million units for the first nine months
of 2002 compared to 12.5 million units for the first nine months of 2001.
Tooling and Other
Tooling and other sales on a global basis declined 5% to $119.1 million
for the first nine months of 2002 compared to $125.6 million for the
comparable prior year period.
Sales by Customer
North American sales, including tooling and other sales, accounted for
approximately 73% of total sales for the nine month period ended September 30,
2002. This compares to 70% for the comparable prior year period. The increase
reflects the Company's strong content growth in North America and higher North
American vehicle production volumes. The Company's three largest customers in
North America were Ford, General Motors and DaimlerChrysler representing
36.5%, 33.3% and 15.7% of total North American sales, respectively, for the
first nine months of 2002 (38.0%, 28.2% and 20.5% for the first nine months of
2001). The growth in General Motors sales reflects the acquisition of
Autosystems and new take over business. The Company's largest North American
production sales programs for calendar 2002 are expected to include the Ford
U152 (Explorer) and EN114 (Crown Victoria and Grand Marquis) programs and the
DaimlerChrysler RS (Minivan), LH (Concorde, Intrepid and 300M) and JR (Stratus
and Sebring) programs.
The majority of production programs with the Asian automotive
manufacturers operating in North America are within Decoma's exterior trim
product range. Although the Company moulds fascias for three Honda programs,
the majority of Asian OEMs currently manufacture their bumper systems
in-house. However, this may change as bumper systems and modules grow in size
and complexity and as Asian OEM capital equipment reinvestment is required.
The Company continues to closely monitor potential opportunities in this area,
particularly in the Southern United States region.
European sales accounted for approximately 27% and 30% of total sales for
the first nine months of 2002 and 2001, respectively. This reduction reflects
growth in North American vehicle production volumes compared to a decline in
European production volumes as well as growth in content per vehicle occurring
at a faster rate in North America as compared to Europe. The Company's three
largest customers in Europe were DaimlerChrysler, Ford and the VW Group
representing 39.1%, 16.3% and 13.9% of total European sales, respectively, for
the first nine months of 2002 (42.2%, 18.0% and 12.1% for the first nine
months of 2001). The Company's largest European production sales programs for
calendar 2002 are expected to include the DaimlerChrysler Mercedes C Class
(W/S/CL203) and A Class (W168) programs, the Ford Mondeo and Jaguar X400
programs and the Opel Vectra program.
Decoma believes that it has strong European growth opportunities with
Ford's Premier Automotive Group ("PAG") and with the VW Group. The PAG group
of Ford brands includes Aston Martin, Jaguar, Land Rover and Volvo. Decoma
intends to leverage its strong relationship with Ford in North America to gain
greater access to PAG in Europe. With respect to the VW Group, Decoma has been
awarded new business which is expected to launch in the latter part of 2002
and 2003 and which will significantly increase the Company's sales to the VW
Group.
On a consolidated basis, the Company's three largest customers are Ford,
General Motors and DaimlerChrysler accounting for 31.0%, 25.8% and 22.0% of
global sales, respectively, for the first nine months of 2002 (32.0%, 21.1%
and 27.0% for the first nine months of 2001).
Operating Income
Operating income improved 25% to $131.0 million for the first nine months
of 2002 compared to $104.9 million for the first nine months of 2001.
Excluding the Merplas deferred preproduction expenditures write off of
$8.3 million (see the "Changes in Accounting Policy - Goodwill and Deferred
Preproduction Expenditures" section of this MD&A for further discussion),
operating income of $139.3 million for the first nine months of 2002 increased
by 29% over operating income for the first nine months of 2002 of
$107.9 million, adjusted to eliminate goodwill amortization of $3.0 million
(see the "Results of Operations - Three Month Periods Ended September 30, 2002
and 2001 - Depreciation and Amortization" section of this MD&A for further
discussion). The increase was driven by strong performance in North America.
North American operating income improved 43% to $148.7 million for the first
nine months of 2002 over the comparable prior year period.
European, excluding Merplas, operating income decreased to $6.7 million
for the first nine months of 2002 compared to $22.0 million for the first nine
months of 2001. The decline is a result of lower production sales in Germany
and Belgium measured in Euros due to the decline in overall European vehicle
production volumes and the decline in production volumes on certain high
content programs. Operating income was also negatively impacted by costs
incurred to support future European sales growth and operating inefficiencies
at two continental Europe facilities. Contributions from the BMW Mini program
at Sybex, the elimination of goodwill amortization and the more favourable
terms under the Company's new affiliation agreement with Magna helped to
partially offset these declines.
Operating losses at Merplas, excluding the write off of deferred
preproduction expenditures, improved $6.9 million to a loss of $10.6 million
for the first nine months of 2002 compared to a loss of $17.5 million for the
comparable prior year period.
EBITDA
On a global basis, EBITDA increased to $197.7 million for the first nine
months of 2002 compared to $164.9 million for the first nine months of 2001.
EBITDA as a percentage of total sales increased to 12.9% compared to 12.2% for
the first nine months of 2002 and 2001, respectively, reflecting improved
operating income.
The North American operating segment generated EBITDA of $189.7 million
or 17.0% of sales for the nine month period ended September 30, 2002. This
compares favourably to EBITDA of $147.2 million or 15.5% of sales for the nine
month period ended September 30, 2001. The European operating segment,
excluding Merplas, generated EBITDA of $21.8 million or 5.7% of European
segment sales, excluding Merplas, for the nine month period ended September
30, 2002. This compares to EBITDA of $36.6 million or 9.6% of European segment
sales, excluding Merplas, for the nine month period ended September 30, 2001.
EBITDA at Merplas improved to a loss of $8.3 million compared to a loss
of $15.0 million for the nine month periods ended September 30, 2002 and 2001,
respectively.
Net Income Attributable to Class A Subordinate Voting and Class B Shares
Net income attributable to Class A Subordinate Voting and Class B Shares
increased 52% to $66.4 million in the first nine months of 2002 compared to
$43.8 million for the first nine months of 2001.
Excluding other income related to the gain on disposition of a non-core
North American division in the first quarter of 2002 of $2.9 million after tax
and the write off of deferred preproduction expenditures of $8.3 million after
tax (see the "Changes in Accounting Policy - Goodwill and Deferred
Preproduction Expenditures" section of this MD&A for further discussion), net
income attributable to Class A Subordinate Voting and Class B Shares for the
nine month period ended September 30, 2002 of $71.8 million increased 53% over
net income attributable to Class A Subordinate Voting and Class B Shares for
the nine month period ended September 30, 2001 of $47.0 million, adjusted to
eliminate the after tax impact of goodwill amortization of $3.2 million (see
the "Changes in Accounting Policy - Goodwill and Deferred Preproduction
Expenditures" section of this MD&A for further discussion).
Diluted Earnings Per Share
Diluted earnings per share for the first nine months of 2002 increased
30% to $0.78 compared to $0.60 for the first nine months of 2001.
Excluding other income related to the gain on disposition of a non-core
North American division in the first quarter of 2002 of $0.03 and the write
off of deferred preproduction expenditures of $0.08 (see the "Changes in
Accounting Policy - Goodwill and Deferred Preproduction Expenditures" section
of this MD&A for further discussion), diluted earnings per share increased 32%
over the first nine months of 2001, adjusted to eliminate goodwill
amortization which added $0.03 to diluted earnings per share for the first
nine months of 2001 (see the "Changes in Accounting Policy - Goodwill and
Deferred Preproduction Expenditures" section of this MD&A for further
discussion). This increase was despite a 10.1 million increase in the weighted
average number of diluted Class A Subordinate Voting and Class B Shares
outstanding substantially all related to the June 2001 Equity Offering.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows for the Three Month Periods Ended September 30, 2002 and 2001
-------------------------------------------------------------------------
Three Month Periods
Ended September 30,
-------------------------------------------------------------------------
(U.S. dollars in millions) 2002 2001
-------------------------------------------------------------------------
EBITDA
North America $56.1 $41.3
Europe
Excluding Merplas 4.6 10.6
Merplas (2.4) (5.3)
------- -------
Total Europe 2.2 5.3
Corporate (2.4) (1.3)
-------------------------------------------------------------------------
55.9 45.3
Interest, cash taxes and other
operating cash flows (14.4) (10.4)
-------------------------------------------------------------------------
Cash flow from operations before
changes in non-cash working capital 41.5 34.9
Cash invested in non-cash working capital (7.2) (9.6)
Fixed and other asset spending, net
North America (11.2) (13.3)
Europe
Excluding Merplas (9.0) (4.6)
Merplas (0.2) (1.6)
Acquisition spending
North America - (12.5)
Less remaining purchase price payable - 4.7
Proceeds from disposition of operating division 0.3 -
Dividends
Convertible Series Preferred Shares (3.0) (3.1)
Class A Subordinate Voting and Class B Shares (3.4) (3.4)
-------------------------------------------------------------------------
Cash generated and available for debt
reduction (shortfall to be financed) 7.8 (8.5)
Net increase in debt 14.9 13.4
Issuances of Class A Subordinate Voting Shares 4.6 -
Foreign exchange on cash and cash equivalents (0.8) 0.7
-------------------------------------------------------------------------
Net increase in cash and cash equivalents $26.5 $ 5.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Flow From Operations
Cash generated from operations and dispositions exceeded capital and
acquisition spending and dividend requirements by $7.8 million for the third
quarter of 2002 compared to a shortfall of $8.5 million for the third quarter
of 2001. The increase in cash generated and available for debt reduction is
primarily the result of improved EBITDA in the third quarter of 2002 compared
to the third quarter of 2001 and net acquisition spending in the third quarter
of 2001 of $7.8 million related to the acquisition of Autosystems.
Investing Activities
Capital spending, excluding acquisition spending and proceeds from
disposition, on a global basis totalled $20.4 million or 36.5% of EBITDA in
the third quarter of 2002 compared to $19.5 million or 43.0% of EBITDA in the
third quarter of 2001. The Company strives to keep its annual capital spending
budget under 50% of EBITDA and will allocate capital within this limit in
priority to those programs generating the greatest return on investment. In
certain circumstances, the Company will spend greater than 50% of EBITDA in a
particular year if a specific capital program is of longer term strategic
importance and the returns over the life of the program justify the
investment. Capital spending in the third quarter of 2002 included
$9.2 million in Europe related to spending to support future sales growth
including spending on a European facility to service the VW Group T5 (Transit
Van) program launching in the fourth quarter of 2002, spending on the
construction of a new metal trim facility in Germany and spending on other
newly awarded production contracts, required improvements and other process
related expenditures. North American spending in the third quarter of 2002
included spending related to improvement programs at Autosystems and spending
related to newly awarded production contracts, required improvements and other
process related expenditures.
North American capital spending of $11.2 million was 20.0% of North
American EBITDA in the three month period ended September 30, 2002. European,
excluding Merplas, capital spending of $9.0 million was 195.7% of European,
excluding Merplas, EBITDA in the third quarter of 2002.
Proceeds from disposition of $0.3 million in the third quarter of 2002
represents the remaining proceeds that were due on the sale, in the first
quarter of 2002, of a non-core North American operating division.
Dividends
Dividends paid on the Company's Convertible Series Preferred Shares were
substantially unchanged at $3.0 million for the third quarter of 2002 compared
to $3.1 million for the third quarter of 2001.
Dividends paid during the third quarter of 2002 on Class A Subordinate
Voting and Class B Shares totaled $3.4 million. This represents dividends
declared of U.S.$0.05 per Class A Subordinate Voting and Class B Share in
respect of the three month period ended June 30, 2002.
Dividends paid during the three month period ended September 30, 2001 on
Class A Subordinate Voting and Class B Shares also totaled $3.4 million
representing dividends declared of U.S.$0.05 in respect of the three month
period ended June 30, 2001.
Subsequent to September 30, 2002, the board of directors of the Company
declared a dividend of U.S.$0.06 per Class A Subordinate Voting and Class B
Share in respect of the three month period ended September 30, 2002. This
represents a 20% increase in the quarterly dividend rate.
Financing Activities
The Company borrowed an additional $14.9 million in the third quarter of
2002 and generated $7.8 million of cash available for debt reduction. During
the third quarter of 2002, the Company borrowed additional funds in Canada to
invest in Europe to fund the Company's new paint line project in Belgium. The
funds invested in Europe will be used for capital expenditures in the fourth
quarter of 2002 and throughout 2003.
Given the multiple jurisdictions in which the Company operates, the
Company is not always able to immediately apply the cash generated in one
jurisdiction to debt held in another jurisdiction. However, as was done in the
second quarter of 2002, during the third quarter of 2002, the Company was able
to utilize additional cash generated and accumulated within its United States
operations to temporarily reduce debt held in Canada.
During the third quarter of 2002, the Company issued 451,400 Class A
Subordinate Voting Shares to the Decoma employee deferred profit sharing
program resulting in a $4.6 million increase in Class A Subordinate Voting
Share capital.
-------------------------------------------------------------------------
Cash Flows for the Nine Month Periods Ended September 30, 2002 and 2001
-------------------------------------------------------------------------
Nine Month Periods
Ended September 30,
-------------------------------------------------------------------------
(U.S. dollars in millions) 2002 2001
-------------------------------------------------------------------------
EBITDA
North America $189.7 $147.2
Europe
Excluding Merplas 21.8 36.6
Merplas (8.3) (15.0)
------- -------
Total Europe 13.5 21.6
Corporate (5.5) (3.9)
-------------------------------------------------------------------------
197.7 164.9
Interest, cash taxes and other operating cash flows (53.8) (42.9)
-------------------------------------------------------------------------
Cash flow from operations before
changes in non-cash working capital 143.9 122.0
Cash generated (invested) in non-cash working capital 3.5 (19.4)
Fixed and other asset spending, net
North America (33.6) (39.0)
Europe
Excluding Merplas (19.8) (8.0)
Merplas (0.9) (3.7)
Acquisition spending
North America (2.6) (20.3)
Less remaining purchase price payable - 9.9
Proceeds from disposition of operating division 5.7 -
Dividends
Convertible Series Preferred Shares (9.1) (8.1)
Class A Subordinate Voting and Class B Shares (10.2) (9.2)
-------------------------------------------------------------------------
Cash generated and available for debt reduction 76.9 24.2
Net decrease in debt (93.6) (114.9)
Repayment of Subordinated Debentures - (25.8)
Issuances of Class A Subordinate Voting Shares 4.7 111.2
Foreign exchange on cash and cash equivalents 1.7 -
-------------------------------------------------------------------------
Net decrease in cash and cash equivalents $ (10.3) $ (5.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Flow From Operations
Cash generated from operations and dispositions exceeded capital and
acquisition spending and dividend requirements by $76.9 million for the nine
month period ended September 30, 2002 compared to $24.2 million for the nine
month period ended September 30, 2001. The increase in cash generated and
available for debt reduction is primarily the result of improved EBITDA, a
reduction in cash invested in non-cash working capital, a reduction in
acquisition spending and proceeds from the disposition of a non-core North
American operating division.
Cash invested in non-cash working capital declined $3.5 million in the
first nine months of 2002 despite a 13% increase in total sales.
Investing Activities
Capital spending, excluding acquisition spending and proceeds from
disposition, on a global basis totalled $54.3 million or 27.5% of EBITDA in
the nine month period ended September 30, 2002 compared to $50.7 million or
$30.7% of EBITDA in the nine month period ended September 30, 2001.
North American capital spending of $33.6 million was 17.7% of North
American EBITDA. European, excluding Merplas, capital spending of $19.8
million was 90.8% of European, excluding Merplas, EBITDA in the first nine
months of 2002.
Given economic uncertainties throughout 2001 and more recently in 2002,
wherever possible the Company has eliminated or delayed planned capital
spending. As a result, full year 2001 and first nine months 2002 capital
spending, excluding acquisition spending and proceeds from disposition, of
$73.2 million and $54.3 million, respectively, was well under the Company's
50% of EBITDA guideline. However, capital spending for the remainder of 2002
is expected to increase. The Company has approved the construction of a new
paint line at an existing facility in Belgium to service a recent new business
award. Capital spending for the new paint line commenced in the first nine
months of 2002 with significant additional spending planned in the fourth
quarter of 2002 and throughout 2003. In addition, the Company will be
constructing a new mould and painting facility in the Southern United States
to service recently awarded business in this region. Capital spending on this
project will commence in the fourth quarter of 2002 with the majority of
capital spending occurring in 2003 and 2004. Approved spending for 2002 is
currently $120 million. However, as a result of further eliminations and
delays in spending, the Company expects actual 2002 spending to range between
$90 million and $100 million. In addition to the two Greenfield projects
described above, current approved capital spending is primarily to support
newly awarded production contracts, required improvements and other process
related expenditures as well as spending to support future sales growth in
Europe including spending on a European facility to serve the VW Group T5
(Transit Van) program launching in the fourth quarter of 2002 and spending on
the construction of a new metal trim facility in Germany.
Management believes that cash balances on hand, existing unutilized
credit facilities, internally generated cash from operations and possible
future financings will be sufficient to meet all planned capital expenditure
requirements.
Acquisition spending in the nine month period ended September 30, 2001
includes the acquisition of Autosystems and the buyout of the remaining
minority interest in the Company's Mexican operations. Acquisition spending in
the nine month period ended September 30, 2002 represents the repayment of one
of the notes issued on the 2001 buyout of the minority interest in the
Company's Mexican operations.
Dividends
Dividends paid on the Company's Convertible Series Preferred Shares
increased to $9.1 million for the first nine months of 2002 compared to
$8.1 million for the comparable prior year period. The increase reflects the
issuance of the Series 4 and 5 Convertible Series Preferred Shares on
completion of the Global Exteriors Transaction on January 5, 2001.
Dividends paid during the nine months ended September 30, 2002 on Class A
Subordinate Voting and Class B Shares totaled $10.2 million. This represents
dividends declared of U.S. $0.05 per Class A Subordinate Voting and Class B
Share in respect of each of the three month periods ended June 30, 2002, March
31, 2002 and December 31, 2001.
Dividends paid during the nine month period ended September 30, 2001 on
Class A Subordinate Voting and Class B Shares totaled $9.2 million
representing dividends declared of Cdn$0.06 U.S.$0.03, U.S.$0.05 and U.S.$0.05
in respect of the three month period ended October 31, 2000, the two month
period ended December 31, 2000, the three month period ended March 31, 2001
and the three month period ended June 30, 2001, respectively.
Financing Activities
Cash generated and available for debt reduction of $76.9 million and cash
resources on hand were used to reduce debt by $93.6 million during the first
nine months of 2002. Debt repayments in the nine month period ended September
30, 2002 reflect the Company's efforts to reduce its European cash and bank
debt positions following the introduction of a new pan-European cash pooling
system in late 2001 and the utilization of cash generated and accumulated
within the Company's United States operations to temporarily reduce debt held
in Canada. These reductions were partially offset by Canadian borrowings to
fund an additional investment in Europe to finance the Company's new Belgium
paint line project. The funds invested in Europe will be used for capital
expenditures in the fourth quarter of 2002 and throughout 2003.
During the first nine months of 2002, the Company issued 16,000 Class A
Subordinate Voting Shares on the exercise of stock options and 451,400 Class A
Subordinate Voting Shares to the Decoma employee deferred profit sharing
program. These issuances resulted in a $4.7 million increase in Class A
Subordinate Voting Share capital.
Issuances of Class A Subordinate Voting Shares in the comparable prior
year period are substantially all related to the June 2001 Equity Offering.
Consolidated Capitalization
The Company's net debt (including bank indebtedness, long-term debt
including current portion, debt due to Magna including current portion and the
current and long-term liability portions of the Convertible Series Preferred
Shares, less cash and cash equivalents) to total capitalization (including net
debt and shareholders' equity), all as determined in accordance with Canadian
GAAP, has improved to 54% at September 30, 2002 compared to 61% at December
31, 2001. The reduction in net debt to total capitalization was due primarily
to income earned during the period and debt repayments with the excess of cash
generated from operations and dispositions over capital and acquisition
spending and dividends.
The above net debt to total capitalization figures treat the liability
portion of the Convertible Series Preferred Shares as debt. The Series 1, 2
and 3 Convertible Series Preferred Shares are retractable by Magna after June
30, 2003 and the Series 4 and 5 Convertible Series Preferred Shares are
retractable by Magna after December 31, 2003 and 2004, respectively.
Accordingly, the liability portion of the Series 1, 2 and 3 Convertible Series
Preferred Shares is shown as a current liability ($95.1 million at September
30, 2002) and the liability portion of the Series 4 and 5 Convertible Series
Preferred Shares is shown as a long-term liability ($113.5 million at
September 30, 2002) in the Company's consolidated balance sheet. However,
these instruments are also convertible into Decoma Class A Subordinate Voting
Shares at a fixed conversion price of Cdn $10.07 for the Series 1, 2 and 3
Convertible Series Preferred Shares and Cdn $13.20 for the Series 4 and 5
Convertible Series Preferred Shares. The Company's Class A Subordinate Voting
Shares have traded between Cdn. $10.56 and Cdn. $21.10 over the 52 week period
ended October 25, 2002. As a result, it is possible that all, or a portion, of
this debt will be settled with Class A Subordinate Voting Shares rather than
cash. This would substantially improve the Company's net debt to total
capitalization.
Unused and Available Financing Resources
At September 30, 2002 the Company had cash on hand of $84.0 million and
$226.6 million of unused and available credit facilities. $211.6 million of
the unused and available credit facilities represents the unused and available
portion of the Company's $300 million extendible, revolving credit facility
that expires on May 29, 2003 at which time Decoma may request, subject to
lender approval, further revolving 364 day extensions.
Debt that comes due in the next twelve months includes $71.7 million of
debt due to Magna including $38.0 million due December 31, 2002 and
$32.7 million due January 1, 2003.
In addition to the above unused and available financing resources, the
Company sponsors a tooling finance program for tooling suppliers to finance
tooling under construction for the Company. Under this program, the facility
provider orders tooling from tooling suppliers and subsequently sells such
tooling to the Company. The facility provider makes advances to tooling
suppliers based on tool build milestones approved by the Company. On
completion of the tooling the facility provider sells the tooling to the
Company for an amount equal to cumulative advances. In the event of tooling
supplier default, the Company will purchase in progress tooling for an amount
approximating cumulative advances.
A number of Magna affiliated company's are sponsors under this facility.
The maximum facility amount is $100 million and is available to individual
sponsors on an uncommitted demand basis subject to individual sponsor sub
limits. The Company's sub limit is $35 million. As at September 30, 2002,
$0.3 million had been advanced to tooling suppliers under the Company's
portion of this facility. This amount is included in accounts payable and
accrued liabilities on the Company's September 30, 2002 consolidated balance
sheet.
Off Balance Sheet Financing
The Company's off balance sheet financing arrangements are limited to
operating lease contracts.
A number of the Company's facilities are subject to operating leases with
Magna and with third parties. As of December 31, 2001, total operating lease
commitments for facilities totalled $16.3 million for 2002 including
$8.7 million under lease arrangements with Magna. For 2006, total operating
lease commitments for facilities totalled $14.5 million including $8.3 million
under lease arrangements with Magna. In certain situations, the Company has
posted letters of credit to collateralize lease obligations.
As of December 31, 2001, approximately 40% of the Company's aggregate
facility square footage is owned and the balance is leased from Magna and
third parties. Most of the Company's existing manufacturing facilities can be
adapted to a variety of manufacturing processes without significant capital
expenditures other than for new equipment.
The Company also has operating lease commitments for equipment. These
leases are generally of shorter duration. As of December 31, 2001, operating
lease commitments for equipment totaled $5.4 million for 2002. For 2006, total
operating lease commitments for equipment totaled $1.9 million.
Although the Company's consolidated contractual annual lease commitments
decline year by year, existing leases will either be renewed or replaced
resulting in lease commitments being sustained at current levels or the
Company will incur capital expenditures to acquire equivalent capacity.
Return on Investment
Decoma defines after tax return on common equity as net income
attributable to Class A Subordinate Voting and Class B Shares over
shareholders' equity excluding Subordinated Debentures and the equity portion
of Convertible Series Preferred Shares. After tax return on common equity was
30% for the year ended December 31, 2001. After tax return on common equity
for the nine month period ended September 30, 2002 was 29.8%
As the Company strives to continue to reduce debt with cash generated
from operations and potentially through future additional equity offerings,
there will be downward pressure on after tax return on common equity. In
addition, any future conversions of the Company's Convertible Series Preferred
Shares into Class A Subordinate Voting Shares will result in a reduction in
after tax return on common equity.
Each operating segment's return on investment is measured using return on
funds employed. Return on funds employed is defined as earnings before
interest and taxes divided by long term assets, excluding future tax assets,
plus non-cash working capital. Return on funds employed represents a return on
investment measure before the impacts of capital structure. The Company views
capital structure as a corporate, rather than operating segment, decision.
-------------------------------------------------------------------------
Return on
Funds Employed Funds Employed
-------------- --------------
For the
nine
month
For the period
year ended ended As at As at
December September December September
31, 30, 31, 30,
(U.S. dollars in millions) 2001 2002 2001 2002
-------------------------------------------------------------------------
North America 25% 34% $589.8 $584.6
Europe
Excluding Merplas 14% 5% 185.3 176.1
Merplas (54%) (64%) 43.9 29.8
Corporate n/a n/a (23.8) (0.8)
-------------------------------------------------------------------------
Global 18% 22% $795.2 $789.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Return on funds employed improvement opportunities exist at Merplas and
throughout the rest of Europe. The reduction in both the return on funds
employed and in funds employed at Merplas is due to the goodwill and deferred
preproduction expenditures write offs in the second quarter of 2002 (see the
"Changes in Accounting Policy - Goodwill and Deferred Preproduction
Expenditures" section of this MD&A for further discussion). Although Decoma
does not expect the return on funds employed for the Company's European
segment to improve to North American levels in the near to medium term, Decoma
believes that there are opportunities to narrow the gap.
OUTLOOK
North American light vehicle production is estimated at 16.3 million
vehicles for 2002, including fourth quarter 2002 vehicle production volumes of
3.9 million units. The fourth quarter and full year outlook for 2002 represent
increases of 3% and 5%, respectively, over 2001 vehicle production volumes.
Western European light vehicle production is estimated at 16.2 million
vehicles for 2002, including fourth quarter 2002 vehicle production volumes of
4.0 million units. The fourth quarter outlook is unchanged from vehicle
production levels in the comparable prior year period and the full year
outlook for 2002 represents a decrease of 2% over 2001 vehicle production
volumes.
CHANGES IN ACCOUNTING POLICY
Goodwill and Deferred Preproduction Expenditures
In September 2001, The Canadian Institute of Chartered Accountants
("CICA") issued Handbook Section 1581, "Business Combinations" ("CICA 1581")
and Handbook Section 3062, "Goodwill and Other Intangible Assets" ("CICA
3062"). CICA 1581 requires that all business combinations initiated after
September 30, 2001 be accounted for using the purchase method of accounting.
In addition, CICA 1581 provides new criteria to determine when an acquired
intangible asset should be recognized separately from goodwill.
CICA 3062 requires the application of the non-amortization and impairment
rules for existing goodwill and intangible assets, which meet the criteria for
indefinite life, beginning with the Company's 2002 fiscal year. As a result,
the Company ceased amortizing goodwill effective January 1, 2002. Net income
was reduced by $1.1 million and $3.2 million for the three and nine month
periods ended September 30, 2001, respectively, as a result of goodwill
amortization.
Under CICA 3062, goodwill impairment is assessed based on a comparison of
the fair value of a reporting unit to the underlying carrying value of the
reporting unit's net assets including goodwill. Previously, goodwill
impairment was assessed based on the estimated future undiscounted cash flows
for the business to which the goodwill relates.
As required by CICA 3062, and as previously disclosed, the Company
completed its initial review of goodwill impairment in June of 2002. Based on
this review, the Company recorded a goodwill write down of $12.3 million in
the second quarter of 2002 related to its United Kingdom reporting unit. In
accordance with CICA 3062, this write down was charged against January 1, 2002
opening retained earnings and did not impact the Company's net income or
earnings per share. As part of its assessment of goodwill impairment, the
Company also reviewed the recoverability of deferred preproduction
expenditures at its Merplas United Kingdom facility. As a result of this
review, $8.3 million of deferred preproduction expenditures were written off
as a charge against income for the second quarter of 2002. Amortization
expense related to the Merplas deferred preproduction expenditures prior to
the write off and included in "depreciation and amortization" expense amounted
to $0.7 million for the nine month period ended September 30, 2002
($1.2 million for the nine month period ended September 30, 2001). (See note 3
to the unaudited interim consolidated financial statements included elsewhere
herein.)
These write downs were required due to the significant operating losses
that have been incurred at the Company's Merplas United Kingdom facility over
the last several quarters. Although significant operational improvements have
been made over the last several quarters, Merplas' longer term profitability
is dependent on filling open capacity. However, no significant additional
production programs have been secured, at this point in time, to utilize this
capacity. Despite these write downs, Decoma remains committed to its United
Kingdom operations over the long term and will continue to aggressively pursue
new business opportunities.
The Company's June 2002 initial assessment for goodwill impairment at all
other reporting units did not result in any further goodwill write downs.
Going forward, the Company will assess goodwill for impairment annually
commencing December 31, 2002. Any future required goodwill write down must be
charged against income. The assessment of goodwill for impairment is subject
to significant measurement uncertainty and requires forward looking
assumptions regarding the impact of improvement plans on current operations,
insourcing and other new business opportunities and program production volume,
price and cost assumptions on current and future business.
Foreign Currency Translation
In December 2001, the CICA amended Handbook Section 1650 "Foreign
Currency Translation" ("CICA 1650"). Under CICA 1650, unrealized translation
gains and losses arising on long-term monetary items denominated in a foreign
currency are no longer deferred and amortized over the period to maturity.
Instead, such gains and losses are recognized in income as incurred.
The Company adopted the amendments to CICA 1650 effective January 1, 2002
with retroactive restatement to January 1, 2001. As a result of applying the
amendments to CICA 1650, net income for the third quarter of 2001 decreased to
$10.7 million from the $10.9 million amount previously reported and diluted
earnings per share for the third quarter of 2001 were unchanged. Net income
for the first nine months of 2001 was reduced to $48.9 million from the
$49.2 million amount previously reported and diluted earnings per share were
reduced to $0.60 from the $0.61 amount previously reported. (See note 3 to the
unaudited interim consolidated financial statements included elsewhere
herein).
COMPARATIVE PERIOD AMOUNTS
North American Vehicle Production and Average Content Per Vehicle
North American vehicle production volumes, as reported by the Company,
have historically included medium and heavy trucks. Effective with the first
quarter of 2002, North American vehicle production volumes, as reported by the
Company, include light vehicles only and exclude medium and heavy trucks. The
Company does not have a substantial amount of North American medium and heavy
truck content, therefore, this change improves the comparability of the
Company's North American production sales with vehicle production volumes.
North American vehicle production volumes continue to include light vehicles
produced in Canada, the United States and Mexico. All comparative period North
American vehicle production and average content per vehicle amounts have been
restated to conform with the current period's presentation.
Western European vehicle production volumes, as reported by the Company,
have historically excluded medium and heavy trucks.
FORWARD LOOKING STATEMENTS
The contents of this MD&A contain statements which, to the extent that
they are not recitations of historical fact, constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act
of 1934. The words "estimate", "anticipate", "believe", "expect", and similar
expressions are intended to identify forward-looking statements. Such forward-
looking information involves important risks and uncertainties that could
materially alter results in the future from those expressed in any forward-
looking statements made by, or on behalf of, the Company. These risks and
uncertainties include, but are not limited to, specific risks relating to the
automotive industry which could impact the Company including without
limitation, pricing concessions and cost absorptions, reliance on major OEM
customers, production volumes and product mix, currency exposure,
environmental matters, new facilities, trade and labour relations,
technological developments by the Company's competitors, government and
regulatory policies, changes in the competitive environment in which the
Company operates and the Company's ability to raise necessary financing. In
addition, forward-looking statements with respect to the Company's vehicle
production volume outlook, return on funds employed opportunities in Europe,
the possible conversion of the Company's Convertible Series Preferred Shares
to Class A Subordinate Voting Shares, the performance of Merplas, capital
spending estimates and the recoverability of the Company's remaining goodwill
are all subject to significant risk and uncertainty. Persons reading this MD&A
are cautioned that such statements are only predictions and that actual events
or results may differ materially. In evaluating such 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. The Company expressly disclaims any
intention and undertakes no obligation to update or revise any forward-looking
statements contained in this MD&A to reflect subsequent information, events or
circumstances or otherwise.
- -30-
For further information: S. Randall Smallbone, Executive Vice President,
Finance and Chief Financial Officer of Decoma at (905) 669-2888. For further
information about Decoma, please visit the Company's website at www.decoma.com. 