PRESS RELEASE
Decoma announces results for first quarter 2003
Sales up 13% and EPS up 11% for quarter
CONCORD, ON, May 5 /CNW/ - Decoma International Inc. (TSX:DEC.A;
NASDAQ:DECA) today announced financial results for the first quarter ended
March 31, 2003.
<<
Financial Highlights
--------------------
Three Months Ended
March 31,
(US$ in millions except per share figures) 2003 2002
Sales $561.1 $497.1
Operating income $46.7 $40.1
Net income $27.2 $23.9
Diluted earnings per share $0.30 $0.27
Weighted average diluted shares outstanding (millions) 98.4 98.2
Commenting on the above results, Al Power, Decoma's President and Chief
Executive Officer, said: "The results for the first quarter continue Decoma's
track record of strong sales and earnings growth. While competition within our
industry remains fierce, we continue to focus on executing on new takeover
business, improving the performance of our facilities, and making investments
that will prepare Decoma for its next phase of growth."
Results of Operations
---------------------
Total sales increased 13% to $561.1 million in the first quarter ended
March 31, 2003, compared to $497.1 million for the same period last year.
Vehicle production volumes were up 2% in North America and remained level in
Europe. Decoma's average content per vehicle increased 4% to $87 in North
America and 21% to $34 in Europe.
In addition to increased vehicle production, Decoma's sales and content
growth in North America benefited from new takeover business, including
certain GM lighting programs; sales on programs launched subsequent to the
first quarter of 2002; and strong volumes on high content production programs
such as the Ford Explorer and GM Impala. European sales and content growth
were driven by new program launches such as the VW Group Transit Van and
DaimlerChrysler Mercedes E Class 4 matic and by the translation of Euro and
British pound sales into U.S. dollars. These increases were partially offset
by lower production volumes on the Jaguar X400 during the quarter and the
cancellation of the DaimlerChrysler PT Cruiser program in Europe in late 2002.
Operating income in the first quarter of 2003 increased 16% to $46.7
million, compared to $40.1 million for the same period last year. Increased
operating income largely reflects the strong performance of the Company's
North American operations, including added gross margin from new takeover
business, improved margins from the Company's sealing and Autosystems lighting
facilities, as well as increased contributions from Decoma's ongoing
continuous improvement programs. These gains were partially offset by the
negative impact of costs incurred to support future sales growth and
investments in new facilities in the southern U.S., Austria, Belgium, Germany
and Poland and efficiency issues at certain European plants. Operating losses
at Decoma's Merplas facility were down on a year-over-year basis.
Net income for the first quarter of 2003 increased 14% to $27.2 million
($0.30 per diluted share), compared to $23.9 million ($0.27 per diluted share)
for the same period in 2002. This increase reflects higher operating income
from Decoma's North American operations, lower interest costs and a decrease
in the Company's effective tax rate compared to the same period last year.
Diluted earnings per share, adjusted to eliminate other income, was up
17% to $0.28 in the first quarter of 2003, compared to $0.24 for the same
period in 2002.
During the first quarter of 2003, cash flow from operations before
changes in non-cash working capital increased 11% to $47.1 million, compared
to $42.5 million the previous year. Capital spending totalled $28.0 million in
the first quarter of 2003 reflecting investments in new facilities as
described above. During the first quarter of 2003, the Company also raised net
proceeds of $66.1 million through a convertible debenture offering.
Quarterly Dividend
------------------
At its meeting today, Decoma's Board of Directors declared a first
quarter 2003 dividend of US$0.06 per share on Class A Subordinate Voting and
Class B Shares payable on June 16, 2003 to shareholders of record on May 30,
2003.
Outlook
-------
Commenting on the Company's outlook, Randy Smallbone, Decoma's Executive
Vice President and Chief Financial Officer, said: "Looking ahead, 2003 is a
transition year for Decoma. Anticipated lower production volumes and new
production launches in both North America and in Europe, combined with
substantial investments in new facilities, will reduce earnings for the full
year, particularly in the second half of 2003." However, he noted that "these
investments will position Decoma to meet current commitments and lay the
foundation for long-term growth."
Full Year 2003
--------------
For the full year 2003, the Company now assumes that North American light
vehicle production volumes will be approximately 15.8 million units, or 3%
lower than 2002. The Company has assumed that European production volumes will
be approximately 16.1 million units, or 1% lower than 2002. Decoma's content
per vehicle for 2003 is expected to be in the range of $85 to $88 in North
America and to approach $40 in Europe.
Based on these assumptions and the factors discussed in the "2003
Outlook" section of the MD&A attached to this press release, the Company
expects its full year 2003 sales to range between $2,150 million to $2,230
million. Approved capital spending for the year is $195 million. Diluted
earnings per share for 2003 is expected to be in the range of $0.84 to $0.98.
Forward Looking Information
---------------------------
This press release contains "forward looking statements" within the
meaning of applicable securities legislation. Readers are cautioned that such
statements are only predictions and involve important risks and uncertainties
that may cause actual results or anticipated events to be materially different
from those expressed or implied herein. 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, and the discussion of risks and uncertainties set out in the
Forward Looking Information section of the MD&A for the quarter ended March
31, 2003, which is attached to this press release. 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). At March 31, 2003, Decoma
had approximately 14,000 employees in 43 manufacturing, engineering and
product development facilities in Canada, the United States, Mexico, Germany,
Belgium, England, France, Austria, the Czech Republic and Japan. Subsequent to
March 31, 2003, the Company acquired a new facility in Mexico and related
warehousing, sequencing and engineering facilities as a result of the
previously announced Federal Mogul lighting acquisition. In addition, the
Company has 4 facilities in the development phase, including a new facility in
the state of Georgia and a facility in Poland.
Conference Call
---------------
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Decoma management will hold a conference call to discuss first quarter
2003 results on Tuesday, May 6, 2003 at 9:30 a.m. EST. The dial-in numbers for
the conference call are (416) 640-4127 (local) or 1 (800) 814-4853 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.
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Contact Information
-------------------
For further information please contact 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.
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 first quarter 2003 results.
DECOMA INTERNATIONAL INC.
50 Casmir Court
Concord, ON, Canada
L4K 4J5
DECOMA INTERNATIONAL INC.
Consolidated Balance Sheets
(Unaudited)
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As at As at
March 31, December 31,
(U.S. dollars in thousands) 2003 2002
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ASSETS
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Current assets:
Cash and cash equivalents $ 138,817 $ 82,059
Accounts receivable 357,482 306,870
Inventories 151,369 160,091
Prepaid expenses and other 16,163 15,902
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663,831 564,922
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Investments 18,356 17,382
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Fixed assets, net 547,884 525,463
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Goodwill, net (note 7) 64,501 62,008
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Future tax assets 8,346 6,015
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Other assets 16,160 16,745
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$ 1,319,078 $ 1,192,535
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Bank indebtedness (note 8(b)) $ 37,666 $ 55,021
Accounts payable 206,137 187,656
Accrued salaries and wages 64,578 59,715
Other accrued liabilities 65,897 54,104
Income taxes payable 10,826 13,336
Long-term debt due within one year 7,228 6,918
Debt due to Magna within one year
(note 8(c)) 108,094 103,536
Convertible Series Preferred Shares,
held by Magna (note 8(a)) 167,359 95,639
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667,785 575,925
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Long-term debt 9,612 9,677
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Long-term debt due to Magna (note 8(c)) 77,455 75,094
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Convertible Series Preferred Shares,
held by Magna (note 8(a)) 61,041 116,140
-------------------------------------------------------------------------
Other long-term liabilities 5,500 4,837
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Future tax liabilities 50,023 48,114
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Shareholders' equity:
Debentures (note 9) 66,196 -
Convertible Series Preferred Shares
(note 10) 17,042 18,765
Class A Subordinate Voting Shares
(note 10) 172,488 172,488
Class B Shares (note 10) 30,594 30,594
Retained earnings 133,092 111,450
Currency translation adjustment 28,250 29,451
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447,662 362,748
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$ 1,319,078 $ 1,192,535
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See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Income and Retained Earnings
(Unaudited)
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Three Month Periods
Ended March 31,
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(U.S. dollars, in thousands
except share and per share figures) 2003 2002
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Sales $ 561,143 $ 497,148
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Cost of goods sold 447,633 399,512
Depreciation and amortization 20,283 19,528
Selling, general and administrative (note 5) 40,300 30,190
Affiliation and social fees 6,180 7,795
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Operating income 46,747 40,123
Equity income (430) (242)
Interest expense, net 2,749 3,204
Amortization of discount on Convertible
Series Preferred Shares 2,046 2,146
Other income (note 6) (1,387) (3,874)
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Income before income taxes and minority
interest 43,769 38,889
Income taxes 16,579 14,996
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Net income $ 27,190 $ 23,893
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Financing charges on Convertible Series
Preferred Shares and Debentures, net of
taxes (note 9) $ (1,464) $ (1,176)
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Net income attributable to Class A
Subordinate Voting and Class B Shares 25,726 22,717
Retained earnings, beginning of period 111,450 49,768
Dividends on Class A Subordinate Voting and
Class B Shares (4,084) (3,380)
Adjustment for change in accounting
policy for goodwill (note 7) - (12,304)
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Retained earnings, end of period $ 133,092 $ 56,801
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Earnings per Class A Subordinate Voting
or Class B Share
Basic $ 0.38 $ 0.34
Diluted $ 0.30 $ 0.27
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Average number of Class A Subordinate
Voting and Class B Shares outstanding
(in millions)
Basic 68.1 67.6
Diluted 98.4 98.2
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See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Cash Flows
(Unaudited)
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Three Month Periods
Ended March 31,
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(U.S. dollars in thousands) 2003 2002
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Cash provided from (used for):
OPERATING ACTIVITIES
Net income $ 27,190 $ 23,893
Items not involving current cash flows 19,956 18,642
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47,146 42,535
Changes in non-cash working capital (3,493) (963)
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43,653 41,572
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INVESTING ACTIVITIES
Fixed asset additions (27,564) (12,889)
Increase in investments and other assets (702) (1,834)
Proceeds from disposition of fixed and
other assets 250 11
Proceeds from disposition of operating
division, net (note 6(b)) - 5,874
Less remaining proceeds receivable (note 6(b)) - (478)
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(28,016) (9,316)
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FINANCING ACTIVITIES
Decrease in bank indebtedness (19,667) (35,402)
Repayments of long term debt (411) (5,721)
Repayments of debt due to Magna (25) (7,770)
Issuance of Debentures (note 9) 66,128 -
Issuances of Class A Subordinate Voting
Shares, net - 35
Dividends on Convertible Series
Preferred Shares (3,141) (2,976)
Dividends on Class A Subordinate Voting
and Class B Shares (4,084) (3,380)
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38,800 (55,214)
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Effect of exchange rate changes on cash
and cash equivalents 2,321 (405)
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Net increase (decrease) in cash and
cash equivalents during the period 56,758 (23,363)
Cash and cash equivalents, beginning
of period 82,059 94,271
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Cash and cash equivalents, end of period $ 138,817 $ 70,908
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See accompanying notes
DECOMA INTERNATIONAL INC.
Notes to Consolidated Financial Statements
Three month periods ended March 31, 2003 and 2002
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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, 2002 (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.
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 March 31, 2003 and the
results of its operations and cash flows for the three month periods
ended March 31, 2003 and 2002.
3. 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.
4. 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.
5. Foreign Exchange
Selling, general and administrative expenses ("SG&A") are net of
earnings (losses) resulting from foreign exchange of:
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Three Month Periods
Ended March 31,
--------------------------------------------------------------------
(U.S. dollars in thousands) 2003 2002
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Foreign exchange income (loss) $ (2,632) $ 595
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6. Other Income
(a) During the first quarter of 2003, the Company permanently
repatriated $75 million from its United States operations. This
repatriation gave rise to the recognition of a pro rata amount of
the Company's cumulative translation adjustment account. This
amount, totalling $1.4 million, has been included in other income
and is not subject to tax.
(b) 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. Income taxes includes an expense of $1.0 million
related to this transaction.
7. Goodwill
In 2002, the Company adopted the new accounting recommendations of
The Canadian Institute of Chartered Accountants for goodwill and
other intangible assets. Upon initial adoption of these
recommendations, the Company recorded a goodwill 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. Refer to note 2 to the Company's annual financial
statements for further information.
8. Debt
(a) Convertible Series Preferred Shares The liability amounts for the
Series 1, 2, 3 and 4 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 aggregate
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 share.
The Series 4 Convertible Series Preferred Shares are retractable by
Magna at their aggregate face value of Cdn$100 million after
December 31, 2003. 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 share. The Company's Class A
Subordinate Voting Shares closed at Cdn$10.84 on April 28, 2003
and have traded between Cdn$8.81 and Cdn$21.10 over the 52 week
period ended April 28, 2003.
The liability amounts for the Series 5 Convertible Series Preferred
Shares are presented as long-term liabilities as these are not
retractable by Magna until December 31, 2005. 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 share.
The Series 1, 2 and 3 Convertible Series Preferred Shares are
redeemable by the Company commencing July 31, 2003 and the Series 4
and 5 Convertible Series Preferred Shares are redeemable by the
Company commencing December 31, 2005.
(b) Credit Facility At March 31, 2003 the Company had lines of credit
totaling $328.8 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, subject to lender
approval, further revolving 364-day extensions. The unused and
available lines of credit at March 31, 2003 were approximately
$277.3 million.
(c) Amounts Due to Magna The Company's debt due to Magna consists of the
following:
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March 31, December 31,
(U.S. dollars in thousands) 2003 2002
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Debt denominated in Canadian dollars (i) $ 40,878 $ 38,256
Debt denominated in Euros (ii) 143,610 139,324
Lease obligation denominated in Euros 1,061 1,050
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185,549 178,630
Less due within one year 108,094 103,536
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$ 77,455 $ 75,094
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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. In addition to the
maturity date, the interest rate on this debt was subsequently
renegotiated to 4.85% effective September 4, 2001, 3.10%
effective January 1, 2002, 3.60% effective April 1, 2002,
3.83% effective July 1, 2002, 3.90% effective October 1, 2002,
3.85% effective January 1, 2003 and 4.25% effective April 1,
2003. The maturity date of this Cdn$60 million debt has been
extended to June 30, 2003.
(ii) The debt denominated in Euros arose on closing of the Global
Exteriors Transaction. The debt initially bore interest at
7.0% to 7.5% and was repayable over the period to December 31,
2004 with the first tranche of the principal due October 1,
2002. In addition to the maturity date, the interest rate on
the first tranche of the principal was renegotiated to 4.29%
effective October 2, 2002, 3.86% effective January 2, 2003 and
3.51% effective April 1, 2003. Of the debt outstanding at
March 31, 2003, $27.4 million is due July 1, 2003,
$38.7 million is due October 1, 2003 and $77.5 million is due
December 31, 2004.
9. Debentures
On March 27, 2003, the Company issued Cdn$100 million of 6.5%
convertible unsecured subordinated debentures (the "Debentures")
maturing March 31, 2010. The Debentures are convertible at the
option of the holder at any time into the Company's Class A
Subordinate Voting Shares at a fixed conversion price of Cdn$13.25
per share. All or part of the Debentures are redeemable at the
Company's option between March 31, 2007 and March 31, 2008 if the
weighted average trading price of the Company's Class A Subordinate
Voting Shares is not less than Cdn$16.5625 for the 20 consecutive
trading days ending five trading days preceding the date on which
notice of redemption is given. Subsequent to March 31, 2008, all or
part of the Debentures are redeemable at the Company's option at any
time. On redemption or maturity, the Company will have the option of
retiring the Debentures with Class A Subordinate Voting Shares in
which case the number of Class A Subordinate Voting Shares issuable
is based on 95% of the trading price of the Company's Class A
Subordinate Voting Shares for the 20 consecutive trading days ending
five trading days prior to the date fixed for redemption or
maturity. In addition, the Company may elect from time to time to
issue and deliver freely tradeable Class A Subordinate Voting Shares
to a trustee in order to raise funds to satisfy the obligation to
pay interest on the Debentures.
Under Canadian GAAP, the key attributes of the Debentures are
separately valued and accounted for as follows:
- the present value of principal and interest (each of which can, at
the option of the Company, be settled with the issuance of Class A
Subordinate Voting Shares) has been presented as equity. The
present value was determined using a discount rate of 7.75%
reflecting an estimate of the coupon rate that the Debentures
would have borne absent the holders' conversion feature. The
resulting discount is accreted to the Debentures' face value over
the period from issuance to unrestricted redemption (March 31,
2008) through periodic charges, net of income taxes, to retained
earnings; and
- the holders' conversion feature is similar to a stock warrant as
it provides the holder with the option to exchange their
Debentures for Class A Subordinate Voting Shares at a fixed price.
The residual approach was used to value this attribute and this
amount is also presented as equity.
In addition to the impact on diluted earnings per share of the
Company's Convertible Series Preferred Shares and issued and
outstanding stock options, diluted earnings per share have been
calculated based on the weighted average number of Class A
Subordinate Voting and Class B Shares that would have been
outstanding during the quarter had the holders of the Debentures
exercised their fixed price conversion rights at the date of
issuance of the Debentures.
10. 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:
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Authorized Issued
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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
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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:
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Weighted Number of
Average Options
Number Exercise Price Exercisable
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Outstanding at December 31,
2002 2,195,000 Cdn $ 13.13 1,444,000
Granted 455,000 Cdn $ 12.43
Cancelled (10,000) Cdn $ 10.30 (4,000)
Vested 102,000
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Outstanding at March 31,
2003 2,640,000 Cdn $ 13.02 1,542,000
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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 March 31, 2003 is 1,408,750. 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
period ended March 31, 2002):
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Three Month Periods
Ended March 31,
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2003 2002
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Risk free interest rate 3.0% N/A
Expected dividend yield 3.2% N/A
Expected volatility 39% N/A
Expected life of options (years) 5 years N/A
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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, based on the fair value of all stock options at the grant
date, would have been:
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Three Month Periods
Ended March 31,
--------------------------------------------------------------------
(U.S. dollars, in thousands
except per share figures) 2003 2002
--------------------------------------------------------------------
Net income attributable to Class A
Subordinate Voting and Class B Shares $ 25,726 $ 22,717
Pro forma adjustments for the fair value
of stock option grants (244) (320)
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Pro forma net income attributable to Class A
Subordinate Voting and Class B Shares $ 25,482 $ 22,397
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Pro forma earnings per Class A Subordinate
Voting or Class B Share
Basic $ 0.37 $ 0.33
Diluted $ 0.30 $ 0.26
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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 March 31, 2003
were exercised or converted:
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Number of Shares
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Class A Subordinate Voting Shares outstanding at
March 31, 2003 36,154,299
Class B Shares outstanding at March 31, 2003 31,909,091
Options to purchase Class A Subordinate Voting Shares 2,640,000
Debentures, convertible by the holders at
Cdn$13.25 per share 7,547,170
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
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108,297,805
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The above amounts include shares issuable if the holders of the
Debentures exercise their conversion option but exclude Class A
Subordinate Voting Shares issuable, only at the Company's option, to
settle interest and principal related to the Debentures. The number
of Class A Subordinate Voting Shares issuable at the Company's
option is dependent on the trading price of Class A Subordinate
Voting shares at the time the Company elects to settle Debenture
interest and principal with shares.
In addition, the Company has reserved 548,600 Class A Subordinate
Voting Shares for future issuances to the Decoma employee deferred
profit sharing plan.
11. 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.
12. Segmented Information The Company operates in one industry segment,
the automotive exteriors business. As at March 31, 2003, the Company
had 24 manufacturing facilities in North America and 12 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 March 31, 2003
--------------------------------------------------------------------
(U.S. dollars North
in thousands) America Europe Corporate Total
--------------------------------------------------------------------
Sales $394,798 $167,348 $ - $562,146
Inter-segment sales (202) (801) - (1,003)
--------------------------------------------------------------------
Sales to external
customers $394,597 $166,547 $ - $561,143
--------------------------------------------------------------------
--------------------------------------------------------------------
Depreciation and
amortization $ 14,153 $ 6,130 $ - $ 20,283
--------------------------------------------------------------------
--------------------------------------------------------------------
Operating income
(loss) $ 54,016 $ (2,774) $ (4,495) $ 46,747
--------------------------------------------------------------------
--------------------------------------------------------------------
Equity income $ (430) $ - $ - $ (430)
--------------------------------------------------------------------
--------------------------------------------------------------------
Interest expense
(income), net $ 5,889 $ 4,336 $ (7,476) $ 2,749
--------------------------------------------------------------------
--------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares $ - $ - $ 2,046 $ 2,046
--------------------------------------------------------------------
--------------------------------------------------------------------
Other income $ - $ - $ (1,387) $ (1,387)
--------------------------------------------------------------------
--------------------------------------------------------------------
Fixed assets, net $377,559 $170,325 $ - $547,884
--------------------------------------------------------------------
--------------------------------------------------------------------
Fixed asset additions $ 20,814 $ 6,750 $ - $ 27,564
--------------------------------------------------------------------
--------------------------------------------------------------------
Goodwill, net $ 46,457 $ 18,044 $ - $ 64,501
--------------------------------------------------------------------
--------------------------------------------------------------------
--------------------------------------------------------------------
Three Month Period Ended March 31, 2002
--------------------------------------------------------------------
(U.S. dollars North
in thousands) America Europe Corporate Total
--------------------------------------------------------------------
Sales $369,625 $128,240 $ - $497,865
Inter-segment sales (692) (25) - (717)
--------------------------------------------------------------------
Sales to external
customers $368,933 $128,215 $ - $497,148
--------------------------------------------------------------------
--------------------------------------------------------------------
Depreciation and
amortization $ 13,754 $ 5,774 $ - $ 19,528
--------------------------------------------------------------------
--------------------------------------------------------------------
Operating income
(loss) $ 43,653 $ (1,709) $ (1,821) $ 40,123
--------------------------------------------------------------------
--------------------------------------------------------------------
Equity income $ (242) $ - $ - $ (242)
--------------------------------------------------------------------
--------------------------------------------------------------------
Interest expense
(income), net $ 3,445 $ 4,934 $ (5,175) $ 3,204
--------------------------------------------------------------------
--------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares $ - $ - $ 2,146 $ 2,146
--------------------------------------------------------------------
--------------------------------------------------------------------
Other income $ (3,874) $ - $ - $ (3,874)
--------------------------------------------------------------------
--------------------------------------------------------------------
Fixed assets, net $353,079 $131,220 $ - $484,299
--------------------------------------------------------------------
--------------------------------------------------------------------
Fixed asset additions $ 8,760 $ 4,129 $ - $ 12,889
--------------------------------------------------------------------
--------------------------------------------------------------------
Goodwill, net $ 44,331 $ 15,229 $ - $ 59,560
--------------------------------------------------------------------
--------------------------------------------------------------------
13. Subsequent Events
Subsequent to March 31, 2003, the Company completed its agreement to
acquire Federal Mogul's original equipment automotive lighting
operations in Matamoros, Mexico, a distribution center in
Brownsville, Texas, an assembly operation in Toledo, Ohio and
certain of the contracts and equipment at Federal Mogul's original
equipment automotive lighting operations in Hampton, Virginia. The
total purchase price is $2.25 million plus an amount for inventory
based on the final determination of the value of inventory on hand.
The transaction closed on April 14, 2003 with a transition of the
Hampton, Virginia contracts and assets subsequent to April 14, 2003.
DECOMA INTERNATIONAL INC.
Management's Discussion and Analysis of Results of Operations
and Financial Position
Three month periods ended March 31, 2003 and 2002
-------------------------------------------------------------------------
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 month period
ended March 31, 2003, included elsewhere herein, and the Company's
consolidated financial statements and MD&A for the year ended December 31,
2002, included in the Company's Annual Report to Shareholders for 2002.
OVERVIEW
Total sales grew to a first quarter record of $561.1 million in the first
quarter of 2003, a 13% increase over the first quarter of 2002. Diluted
earnings per share was also a first quarter record of $0.30 representing an
improvement of 11% over diluted earnings per share of $0.27 for the first
quarter of 2002. Excluding other income in both the first quarters of 2003 and
2002, diluted earnings per share increased 17% to $0.28 for the first quarter
of 2003 compared to $0.24 for the first quarter of 2002.
Impact of Translation of Foreign Currency Results into the Company's U.S.
Dollar Reporting Currency
-------------------------------------------------------------------------
Three Month Periods Ended
March 31,
---------------------------
%
2003 2002 Change
-------------------------------------------------------------------------
1 Cdn$ equals U.S. dollars 0.662 0.627 6%
1 Euro equals U.S. dollars 1.073 0.877 22%
1 British Pound equals U.S. dollars 1.602 1.427 12%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The preceding table reflects the average foreign exchange rates between
the primary currencies in which the Company conducts business and its U.S.
dollar reporting currency. Significant changes in the exchange rates of these
currencies against the U.S. dollar impact the reported U.S. dollar amounts of
the Company's results. Due to a significant strengthening of the Canadian
dollar, Euro and British Pound each against the U.S. dollar in the first
quarter of 2003 compared to the first quarter of 2002, the Company's reported
U.S. dollar North America and Europe segment sales have benefited
considerably. Reported North America segment operating earnings have also
benefited. However, reported Europe segment operating losses have been
magnified as a result of a stronger Euro and British Pound. Throughout this
MD&A reference is made to the impact of foreign currency translation on
reported U.S. dollar amounts where relevant.
RESULTS OF OPERATIONS
Three Month Periods Ended March 31, 2003 and 2002
Sales
-------------------------------------------------------------------------
Three Month Periods Ended
March 31,
---------------------------
%
2003 2002 Change
-------------------------------------------------------------------------
Light Vehicle Production Volumes (in millions)
North America 4.2 4.1 2%
Western Europe 4.3 4.3 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Content Per Vehicle (U.S. dollars)
North America $87 $84 4%
Europe 34 28 21%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Production Sales (U.S. dollars in millions)
North America $359.7 $341.6 5%
Europe
Excluding Merplas 139.9 109.2 28%
Merplas 6.6 10.6 (38%)
------- -------
Total Europe 146.5 119.8 22%
Global Tooling and Other Sales 54.9 35.7 54%
-------------------------------------------------------------------------
Total Sales $561.1 $497.1 13%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America
North American production sales grew by 5% to $359.7 million in the first
quarter of 2003 from $341.6 million in the first quarter of 2002. This
increase was driven in large part by growth in average North American content
per vehicle. North American content per vehicle grew to approximately $87
compared to $84 for the first quarters of 2003 and 2002, respectively. The
increase in content was driven by the translation of Canadian dollar sales
into the Company's U.S. dollar reporting currency which positively impacted
reported North American production sales. The Canadian dollar strengthened
against the U.S. dollar by 6% for the three month period ended March 31, 2003
compared to the three month period ended March 31, 2002.
In addition, North American content per vehicle benefited from new
takeover business including certain General Motors lighting programs; growth
in running board sales; sales on programs that launched subsequent to the
first quarter of 2002 including the Ford U231 (Aviator) program and the
DaimlerChrysler KJ (Jeep Liberty) and AN (Dakota) specialty vehicle programs;
and strong volumes on other high content production programs including the
Ford U152 (Explorer), Ford U204 (Escape) and General Motors GMX 210 (Impala)
programs. These increases were partially offset by lower Mexican production
sales as a result of lower production volumes on the Ford CT120 (Escort), the
DaimlerChrysler PT Cruiser and the General Motors GMT 805 (Avalanche) and GMT
806 (Escalade EXT) programs; lower production volumes on certain other high
content programs including the DaimlerChrysler LH (Concorde, Intrepid and
300M), JR (Stratus, Sebring and Sebring Convertible) and RS (Minivan) programs
and the Ford WIN126 (Windstar) and EN114 (Crown Victoria, Grand Marquis)
programs; the disposition of a non-core North American operating division in
the first quarter of 2002; and the closure of the Company's specialty vehicle
operation in Montreal due to the end of production of the F Car (Camaro,
Firebird) at General Motors' St. Therese assembly plant in the third quarter
of 2002.
Increases in North American production sales were also driven by an
increase in vehicle production volumes. Total North American light vehicle
production for the first quarter of 2003 was 4.2 million units representing an
increase of 2% from the 4.1 million vehicles built in the first quarter of
2002.
Europe
European production sales increased 22% to $146.5 million in the first
quarter of 2003 compared to $119.8 million for the first quarter of 2002.
European content per vehicle grew 21% to approximately $34 compared to $28 for
the first quarters of 2003 and 2002, respectively. Content growth was 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 22% and 12%, respectively, for
the first quarter of 2003 compared to the first quarter of 2002. Content
growth was also driven by new program launches in the latter part of 2002 and
the first quarter of 2003 including the launch of the VW Group T5 (Transit
Van) and the DaimlerChrysler Mercedes E Class 4-matic front end module
contracts, the launch of various new Audi production programs and continued
strong volumes on the BMW Mini program.
These increases were partially offset by a decline in production volumes
on the Jaguar X400 program produced at Merplas. Merplas' sales declined from
$10.6 million in the first quarter of 2002 to $6.6 million in the first
quarter of 2003 due to the introduction of four day weeks and a two week
production shutdown in February 2003 at the Jaguar Halewood assembly facility.
In addition, the cancellation at the beginning of the third quarter of 2002 of
DaimlerChrysler PT Cruiser production in Europe and the completion of the
Audi TT hard top program in the third quarter of 2002 partially offset
European content growth.
Western European vehicle production volumes were substantially unchanged
at 4.3 million units for the first quarter of 2003.
Global Tooling and Other
Tooling and other sales on a global basis increased 54% to $54.9 million
compared to $35.7 million for the first quarters of 2003 and 2002,
respectively. The increase in tooling sales relates primarily to the Ford V229
(Freestar) program in North America and the VW Group T5 (Transit Van) program
in Europe. The Ford V229 (Freestar) program launches in the third quarter of
2003 and replaces the WIN126 (Windstar) program. The VW Group T5 (Transit Van)
program launched in the fourth quarter of 2002.
Sales by Customer
North American sales, including tooling and other sales, accounted for
approximately 70% of total sales for the first quarter of 2003. This compares
to 74% for the first quarter of 2002. The decrease reflects the Company's
strong content growth in Europe. The Company's three largest customers in
North America were Ford, General Motors and DaimlerChrysler representing
40.6%, 32.3% and 14.6% of total North American sales, respectively, for the
first quarter of 2003 (37.4%, 34.1% and 14.8% for the first quarter of 2002).
The Company's largest North American production sales programs for 2003 are
expected to include the Ford U152 (Explorer), EN114 (Crown Victoria and Grand
Marquis) and U204 (Escape and Tribute) programs and the DaimlerChrysler JR
(Stratus, Sebring and Sebring Convertible) and LH (Concorde, Intrepid and
300M) programs. The DaimlerChrysler LH (Concorde, Intrepid and 300M) program
remains one of the Company's largest production sales programs despite the
fact that this program comes to an end in the third quarter of 2003 and the
new LX program does not start up until the first quarter of 2004.
The majority of production programs with the Asian automotive
manufacturers operating in North America are within Decoma's exterior trim
product range and the Company continues to win more business in this area.
Although the Company moulds fascias for a number of North American Honda
programs and continues to also grow this business, 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 30% and 26% of total sales for
the first quarters of 2003 and 2002, respectively. The Company's three largest
customers in Europe were DaimlerChrysler, the VW Group and Ford representing
35.2%, 18.8% and 13.4% of total European sales, respectively, for the first
quarter of 2003 (42.3%, 9.4% and 18.5% for the first quarter of 2002). The
growth in sales to the VW Group is the result of the launch of the VW Group T5
(Transit Van) module contract and the recent launch of a number of new Audi
programs. The Company's largest European production sales programs for 2003
are expected to include the DaimlerChrysler Mercedes C Class and E Class
programs, the VW Group T5 (Transit Van) program, the Opel Vectra program and
the Ford Mondeo program.
The Company's sales to the VW Group are expected to continue to grow
significantly as the recent VW and Audi program launches ramp up. In addition,
on completion of the construction of a new paint line in Belgium, the
Company's Belplas facility is scheduled to launch fascia production for a
portion of the volume on the VW Group's A5 (Golf) program in the fourth
quarter of 2003.
On a consolidated basis, the Company's three largest customers are Ford,
General Motors and DaimlerChrysler accounting for 32.5%, 24.8% and 20.8% of
global total sales, respectively, for the first quarter of 2003 (32.6%, 26.5%
and 21.9% for the first quarter of 2002).
Gross Margin
Gross margin dollars increased to $113.5 million in the first quarter of
2003 compared to $97.6 million in the first quarter of 2002. As a percentage
of total sales, gross margin increased to 20.2% compared to 19.6% for the
first quarters of 2003 and 2002, respectively.
Gross margins were positively affected by contributions from both new
takeover business and improving margins at the Company's Autosystems lighting
facilities; improved performance at a North American sealing facility; and the
impact of the Company's ongoing continuous improvement programs. These
improvements were partially offset by spending at the Company's new mould and
painting facility currently under construction in the Southern United States
("Decostar") that will launch in 2004; costs incurred to support future
European sales growth; growth in European front end module sales and the lower
margins associated with purchased components; continued operating
inefficiencies at certain European facilities; and further OEM price
concessions.
Depreciation and Amortization
Depreciation and amortization costs increased to $20.3 million for the
first quarter of 2003 compared to $19.5 million for the first quarter of 2002.
The increase is attributable to the translation of Canadian dollar, Euro and
British Pound depreciation expense into the Company's U.S. dollar reporting
currency. Each of the Canadian dollar, Euro and British Pound strengthened
significantly against the U.S. dollar for the three month period ended
March 31, 2003 compared to the three month period ended March 31, 2002.
The Company's current capital spending program incorporates significant
amounts for two greenfield projects, being the new Decostar mould and painting
facility in the Southern United States and the new paint line at the Company's
Belplas facility in Belgium. Depreciation will not commence on these projects
until production begins. Production is currently scheduled to commence at
Decostar in 2004 and at the new Belplas paint line in the fourth quarter of
2003.
Selling, General and Administrative ("S,G&A")
S,G&A costs were $40.3 million for the first quarter of 2003, up from
$30.2 million for the first quarter of 2002. This increase reflects the
translation of Canadian dollar, Euro and British Pound S,G&A costs into the
Company's U.S. dollar reporting currency. Each of the Canadian dollar, Euro
and British Pound strengthened significantly against the U.S. dollar for the
three month period ended March 31, 2003 compared to the three month period
ended March 31, 2002. In addition, the increase reflects foreign exchange
losses of $2.6 million in the first quarter of 2003 largely on U.S. dollar
denominated monetary items held within the Company's Canadian operations. In
the first quarter of 2002, S,G&A expense was net of foreign exchange income of
$0.6 million.
The remainder of the increase in S,G&A expense is related to the
Company's Decostar and Belplas greenfield projects; additional S,G&A expense
at recently launched new European facilities including Modultec and Graz which
service the VW Group T5 (Transit Van) and DaimlerChrysler Mercedes E Class
module contracts, respectively, and at a facility in Poland still under
development to service Polish production volumes on both the VW Group T5
(Transit Van) and SLW (City Car) programs; higher compensation costs for
managers with compensation tied to Company profits; and increases in sales,
marketing, program management and other costs to support the higher sales
levels.
As a percentage of sales, S,G&A increased to 7.2% for the first quarter
of 2003 compared to 6.1% for the first quarter of 2002.
In addition to the benefits provided by Magna to Decoma under the
affiliation agreement noted below, Magna provides certain management and
administrative services to the Company, including specialized legal,
environmental, immigration, 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. The
cost of management and administrative services provided by Magna and included
in S,G&A was substantially unchanged at $0.9 million for the first quarters of
2003 and 2002.
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.
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.
Affiliation and social fee expense for the first quarter of 2003
decreased to $6.2 million from $7.8 million for the first quarter of 2002. The
decrease reflects the more favourable terms of the new affiliation agreement
with Magna. Affiliation fee expense in the first quarter of 2003 is based on
1% of Decoma's consolidated net sales (as defined in the agreement) as
compared to 1.5% for the first quarter of 2002. The affiliation fee rebates
described above impacting the fees payable for the first quarter of 2002 were
not recognized until the second quarter of 2002 as the amendments to the
affiliation agreement were finalized on June 25, 2002. These decreases in
affiliation and social fee expense were partially offset by the impact of
increases in consolidated net sales and pretax profits on which the
affiliation and social fees are calculated, respectively.
Operating Income
-------------------------------------------------------------------------
Three Month Periods Ended
March 31,
----------------------------
%
(U.S. dollars in millions) 2003 2002 Change
-------------------------------------------------------------------------
Operating Income
North America $ 54.0 $ 43.6 24%
Europe
Excluding Merplas 1.0 2.3
Merplas (3.8) (4.0)
-------- --------
Total Europe (2.8) (1.7) (65%)
Corporate (4.5) (1.8)
-------------------------------------------------------------------------
Total Operating Income $ 46.7 $ 40.1 16%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total operating income grew by 16% to $46.7 million for the first quarter
of 2003 compared to $40.1 million for the first quarter of 2002. As a
percentage of total sales, operating income improved to 8.3% for the first
quarter of 2003 from 8.1% for the first quarter of 2002.
The increase in the corporate segment operating loss is in part the
result of foreign exchange losses of $1.3 million in the first quarter of 2003
largely on U.S. dollar denominated monetary items held in Canada. In the first
quarter of 2002, the corporate segment operating loss was net of foreign
exchange income of $0.1 million.
North America
North American operating income increased to $54.0 million from
$43.6 million for the first quarters of 2003 and 2002, respectively. This
increase is the result of added gross margin from new takeover business and
improving margins both at the Company's Autosystems lighting facilities;
improved performance at a North American sealing facility; contributions from
the growth in production sales; and increased contributions as a result of the
Company's ongoing continuous improvement programs. In addition, the impact of
more favourable terms under the new affiliation agreement with Magna
contributed to the improvement in operating income. These improvements were
partially offset by Decostar period costs totaling $2.0 million; the closure
of the Company's specialty vehicle operation in Montreal due to the end of
production of the F Car (Camaro, Firebird) at General Motors' St. Therese
assembly plant in the third quarter of 2002; the disposition of a non-core
North American operating division in the first quarter of 2002; and further
OEM price concessions.
Europe
European operating losses increased to $2.8 million for the first quarter
of 2003 compared to losses of $1.7 million for the first quarter of 2002.
Operating results were negatively impacted by costs incurred to support
European sales growth including:
- costs associated with various Audi production programs recently
launched at the Company's facilities in Germany and costs related to
the start-up and transfer of programs to a new metal trim facility
located in Germany which commenced partial operations in the first
quarter of 2003;
- 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 located in
Germany with painted fascia production coming from the Company's
existing Decoform facility also in Germany;
- costs associated with establishing a moulding, assembly and sequencing
facility located in Poland to commence operations in the second half of
2003 to service the VW Group T5 (Transit Van) and the SLW (City Car)
Polish production programs;
- costs associated with Magna Steyr's DaimlerChrysler Mercedes E
Class 4 matic assembly program which launched in the first quarter of
2003 at Decoma's new assembly and sequencing facility located in Graz,
Austria (fascias for this program are 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
latter part of 2003 at a new assembly and sequencing facility to be
constructed in Zuffenhausen, Germany with fascia and related trim
production coming from the Company's existing Decoform facility and
from third parties; and
- costs associated with the DaimlerChrysler Mercedes A Class program that
will launch in the fourth quarter of 2004 at a new assembly and
sequencing facility, to be named Carmodul, located in Rastatt, Germany
with fascia production coming from the Company's existing Innoplas
facility also in Germany.
It is not possible to precisely quantify the impact on current quarter
Europe operating income of the costs associated with the above program
launches. However, the aggregate change in operating income in the first
quarter of 2003 compared to the first quarter of 2002 at European divisions
impacted by the above programs that launched in 2002 and the first quarter of
2003 or that will launch over the balance of 2003 (including Prometall,
Decoform, Modultec, Formatex, Graz, and Belplas) was a reduction of
$3.9 million.
European operating income also continues to be negatively impacted by
Merplas which continues to operate at production levels well below capacity.
Merplas generated an operating loss of $3.8 million for the first quarter of
2003 compared to a loss of $4.0 million for the first quarter of 2002. The
impact of operating improvements implemented at Merplas over the last year
were partially offset by the reduced fixed cost coverage effects of a
significant drop in Merplas' production sales to $6.6 million from
$10.6 million for the first quarters of 2003 and 2002, respectively, as a
result of lower Jaguar X400 production volumes. In addition, the reported
U.S. dollar loss for the first quarter of 2003 was negatively impacted by
translation as the British Pound strengthened 12% against the U.S. dollar in
the three month period ended March 31, 2003 compared to the three month period
ended March 31, 2002. Readers are asked to refer to the "United Kingdom"
section of this MD&A for further discussion regarding Merplas.
Finally, in addition to the impact on operating results of the above
issues, European operating income continues to be negatively impacted by
efficiency and other performance issues at its Prometall and Decotrim
facilities. Management changes have been made at these divisions and
operational improvement plans have been developed and are being implemented at
both of these facilities.
The above factors were partially offset by:
- by continued strong performance at the Company's Innoplas fascia
facility in Germany;
- the recovery in the current quarter of DaimlerChrysler PT Cruiser
program cancellation costs; and
- the impact of more favourable terms under the Company's new affiliation
agreement with Magna.
As detailed above, the Company expects significant European, excluding
Merplas, sales growth over the next few years. Once through this launch
period, and as continuous improvement plans are implemented at underperforming
divisions, the Company expects that European operating income will improve.
Equity Income
Income from equity accounted investments, which includes the Company's
40% share of Bestop, Inc. ("Bestop") and Modular Automotive Systems, LLC,
increased to $0.4 million for the first quarter of 2003 compared to
$0.2 million for the first quarter of 2002. The increase is primarily
attributable to improved performance at Bestop due to fixed cost reductions as
a result of the closure in the latter part of 2002 of one of Bestop's
facilities.
Interest Expense
Interest expense for the first quarter of 2003 declined to $2.7 million
compared to $3.2 million for the first quarter of 2002 as a result of debt
reduction. Total interest bearing net debt (including bank indebtedness,
long-term debt including current portion and debt due to Magna including
current portion, less cash and cash equivalents) declined to $101.2 million at
March 31, 2003 compared to $257.7 million at December 30, 2001. Debt reduction
was funded through cash generated from operations less capital and acquisition
spending and dividends as well as $66.1 million of cash generated from the
issuance in March 2003 of Cdn$100 million of 6.5% convertible unsecured
subordinated debentures (the "Debentures") maturing March 31, 2010. Under
Canadian generally accepted accounting principles ("GAAP"), Debenture carrying
costs do not impact interest expense. Refer to the "Financing Charges" section
of this MD&A and to note 9 to the Company's unaudited interim consolidated
financial statements for the three month period ended March 31, 2003, included
elsewhere herein, for further discussion regarding the Debentures.
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 first quarter of 2003 compared to $2.1 million for the
first quarter of 2002. The decrease reflects lower amortization as a result of
the discount on the Series 3 Convertible Series Preferred Shares being fully
amortized as of July 31, 2002.
Other income
Other income in the first quarter of 2003 of $1.4 million represents the
recognition in income of a pro rata amount of the Company's cumulative
translation adjustment account on the permanent repatriation of $75 million of
the Company's net investment in its United States operations. This amount was
not subject to tax.
Other income in the first quarter of 2002 represents a $3.9 million gain
on the sale of a non-core North American operating division. Income tax
expense includes $1.0 million related to this gain.
Income Taxes
The Company's effective income tax rate for the first quarter of 2003
decreased to 37.9% from 38.6% for the first quarter of 2002. The effective
income tax rate for the first quarter of 2003 benefited from lower Ontario
statutory income tax rates compared to the first quarter of 2002 and from
other income of $1.4 million in the current quarter which was not subject to
tax.
The Company's effective tax rate continues to be high due to Convertible
Series Preferred Share amortization which is not deductible for tax purposes
and losses which are not being tax benefited primarily in the United Kingdom
and Belgium. Cumulative unbenefited tax loss carryforwards total approximately
$85.1 million. Substantially all of these losses have no expiry date and will
be available to shelter future taxable income in these jurisdictions.
Net Income
Net income for the first quarter of 2003 increased 14% to $27.2 million
from $23.9 million for the first quarter of 2002.
Net income for the first quarter of 2003, excluding other income of
$1.4 million, was $25.8 million. Net income in the first quarter of 2002,
excluding other income net of taxes of $2.9 million, was $21.0 million.
Adjusted net income for the first quarter of 2003 increased 23% over adjusted
net income for the first quarter of 2002. This increase is primarily
attributable to higher operating income driven by the Company's strong North
American performance, lower interest costs and a decrease in the Company's
effective tax rate.
Financing Charges
The deduction from net income of dividends declared and paid on the
Convertible Series Preferred Shares (comprised of dividends declared on the
Convertible Series Preferred Shares less the reduction of the Convertible
Series Preferred Shares dividend equity component) increased to $1.4 million
for the first quarter of 2003 compared to $1.2 million for the first quarter
of 2002. The increase reflects translation of Canadian dollar dividends into
the Company's U.S. dollar reporting currency due to the strengthening of the
Canadian dollar against the U.S. dollar in the first quarter of 2003 compared
to the first quarter of 2002.
During March 2003, the Company issued the Debentures. The Company has the
option to settle Debenture interest, and principal on redemption or maturity,
with Class A Subordinate Voting Shares. In addition, the holders of the
Debentures have the right to convert the Debentures into Class A Subordinate
Voting Shares at a fixed price at any time. As a result, under Canadian
generally accepted accounting principles ("GAAP") the Debentures are presented
as equity and the carrying costs associated with Debentures are charged to
retained earnings. Therefore, the Debenture carrying charges do not impact net
income. However, because interest on the Debentures is paid in preference to
common shareholders, the Debenture carrying charges reduce net income
attributable to Class A Subordinate Voting and Class B Shares. Refer to note 9
to the Company's unaudited interim consolidated financial statements for the
three month period ended March 31, 2003 included elsewhere herein for further
discussion regarding the Debentures.
Financing charges, net of income tax recoveries, in the first quarter of
2003 related to the issuance of the Debentures were minimal as the Debentures
were not issued until March 27, 2003.
Diluted Earnings Per Share
Diluted earnings per share for the first quarter of 2003 increased 11% to
$0.30 compared to $0.27 for the first quarter of 2002.
Diluted earnings per share, adjusted to eliminate other income, was $0.28
in the first quarter of 2003 and $0.24 in the first quarter of 2002. Adjusted
diluted earnings per share for the first quarter of 2003 increased 17% over
adjusted diluted earnings per share for the first quarter of 2002.
The weighted average number of diluted Class A Subordinate Voting and
Class B Shares outstanding increased to 98.4 million for the first quarter of
2003 compared to 98.2 for the first quarter of 2002. 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 the Debentures at the end of the current quarter. The
adjustment to the weighted average number of diluted Class A subordinate
Voting and Class B Shares outstanding is calculated assuming the holders of
the Debentures exercised their fixed price conversion rights at the date of
issuance of the Debentures. This adjustment was small in the first quarter of
2003 as the Debentures were issued at the end of the quarter.
These increases in the weighted average number of diluted Class A
Subordinate Voting and Class B Shares outstanding were partially offset by a
reduction in diluted shares outstanding under the Company's stock option plan,
as determined under the treasury stock method, due to a decline in the trading
price of the Company's Class A Subordinate Voting Shares.
Earnings Growth
The following table isolates the year over year impact of other income on
the Company's key earnings measures.
-------------------------------------------------------------------------
(U.S. dollars, in millions Net Diluted
except per share figures) Income EPS
-------------------------------------------------------------------------
First quarter of 2002 as reported $ 23.9 $ 0.27
Deduct other income in the first quarter of 2002 (2.9) (0.03)
-------------------------------------------------------------------------
Adjusted first quarter of 2002 base 21.0 0.24
Other income in the first quarter of 2003 1.4 0.02
Remaining earnings growth over
adjusted first quarter of 2002 base 4.8 23% 0.04 17%
-------------------------------------------------------------------------
First quarter of 2003 as reported $ 27.2 $ 0.30
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows for the Three Month Periods Ended March 31, 2003 and 2002
-------------------------------------------------------------------------
Three Month Periods
Ended March 31,
-------------------------------------------------------------------------
(U.S. dollars in millions) 2003 2002
-------------------------------------------------------------------------
EBITDA
North America $ 68.1 $ 57.4
Europe
Excluding Merplas 6.6 7.2
Merplas (3.2) (3.1)
-------- --------
Total Europe 3.4 4.1
Corporate (4.5) (1.8)
-------------------------------------------------------------------------
67.0 59.7
Interest, cash taxes and other operating
cash flows (19.9) (17.2)
-------------------------------------------------------------------------
Cash flow from operations before changes in
non-cash working capital 47.1 42.5
Cash invested in non-cash working capital (3.5) (1.0)
Fixed and other asset spending, net
North America (20.9) (8.9)
Europe (7.1) (5.8)
Proceeds from disposition of operating division - 5.4
Dividends
Convertible Series Preferred Shares (3.1) (3.0)
Class A Subordinate Voting and Class B Shares (4.1) (3.4)
-------------------------------------------------------------------------
Cash generated and available for debt reduction 8.4 25.8
Net decrease in debt (20.0) (48.8)
Issuance of Debentures 66.1 -
Foreign exchange on cash and cash equivalents 2.3 (0.4)
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents $ 56.8 $ (23.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 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.
Cash Flow From Operations
Cash generated from operations and dispositions exceeded capital spending
and dividend requirements by $8.4 million for the first quarter of 2003
compared to $25.8 million for the first quarter of 2002. The decline is due to
increased capital spending and dividends in the first quarter of 2003 compared
to the first quarter of 2002 partially offset by improved EBITDA. In addition,
cash generated in the first quarter of 2002 included $5.4 million from the
disposition of a non-core North American operating division.
The Company invested $3.5 million in non-cash working capital in the
first quarter of 2003 as a result of continued growth in sales.
Investing Activities
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 expected returns over the life of the program justify the
investment.
Capital spending, excluding acquisition spending and proceeds from
disposition, on a global basis totalled $28.0 million in the first quarter of
2003 compared to $14.7 million in the first quarter of 2002.
North American capital spending was $20.9 million in the first quarter of
2003 and included spending on the Company's new Decostar mould and painting
facility in the Southern United States that will launch in 2004. North
American capital spending also includes amounts related to newly awarded
production contracts, required improvements and other process related
expenditures.
European capital spending in the first quarter of 2003 totalled
$7.1 million and includes spending in support of future sales growth including
spending on the Company's new paint line project in Belgium that will launch
in the fourth quarter of 2003, continued spending at the Company's recently
launched Modultec German facility, spending at the Company's new Graz, Austria
sequencing centre which launched in the current quarter and spending on other
newly awarded production contracts, required improvements and other process
related expenditures.
Given economic uncertainties throughout 2001 and 2002, wherever possible
the Company eliminated or delayed planned capital spending. As a result, full
year 2001 and 2002 capital spending, excluding acquisition spending and
proceeds from disposition, was well under the Company's 50% of EBITDA
guideline. However, capital spending for 2003 is expected to increase and
exceed 50% of EBITDA. Approved spending for 2003 is currently $195 million.
The increase reflects continued spending in 2003 on the Company's Belgium
paint line and Decostar greenfield projects, European spending related to new
program launches and spending due to prior deferrals of previously planned
facility upgrade and other process related and improvement projects. Readers
are asked to refer to the "Financial Condition, Liquidity and Capital
Resources - Unused and Available Financing Resources" section of this MD&A for
further discussion.
Dividends
Dividends paid on the Company's Convertible Series Preferred Shares were
$3.1 million for the first quarter of 2003 compared to $3.0 million for the
first quarter of 2002. The increase reflects translation of Canadian dollar
dividends into the Company's U.S. dollar reporting currency due to the
strengthening of the Canadian dollar against the U.S. dollar in the first
quarter of 2003 compared to the first quarter of 2002.
Dividends paid in the first quarter of 2003 on Class A Subordinate Voting
and Class B Shares totalled $4.1 million. This represents dividends declared
of US$0.06 per share in respect of the three month period ended December 31,
2002.
Dividends paid during the first quarter of 2002 on Class A Subordinate
Voting and Class B Shares totalled $3.4 million representing dividends
declared of US$0.05 per share in respect of the three month period ended
December 31, 2001.
Subsequent to March 31, 2003, the board of directors of the Company
declared a dividend of US$0.06 per Class A Subordinate Voting and Class B
Share in respect of the three month period ended March 31, 2003. This
represents an increase of 20% over dividends declared per share in respect of
the three month period ended March 31, 2002.
Financing Activities
On March 27, 2003, the Company completed the issuance of the Debentures
for net proceeds of $66.1 million. The Debenture proceeds, as well as the
excess of cash generated from operations over capital spending and dividend
requirements, were applied to reduce third party debt by $20.0 million in the
first quarter of 2003 with the balance added to the Company's cash resources
on hand.
At March 31, 2003, the Company had cash and cash equivalents of
$138.8 million and bank indebtedness of $37.7 million compared to cash and
cash equivalents of $82.1 million and bank indebtedness of $55.0 million at
December 31, 2002. Bank indebtedness of $37.7 million at March 31, 2003 was
primarily in Europe. 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. Subsequent
to March 31, 2003, the Company was able to utilize cash held in Canada to
reduce European bank indebtedness.
Consolidated Capitalization
-------------------------------------------------------------------------
March 31, December 31,
(U.S. dollars in millions) 2003 2002
-------------------------------------------------------------------------
Cash and cash equivalents $ (138.8) $ (82.1)
Bank indebtedness 37.7 55.0
-------------------------------------------------------------------------
(101.1) (27.1)
Debt due within twelve months
Due to Magna June 30, 2003
(previously due March 31, 2003) 40.9 38.3
Due to Magna July 1, 2003
(previously due April 1, 2003) 27.4 26.6
Due to Magna October 1, 2003 38.7 37.6
Other 8.3 8.0
-------------------------------------------------------------------------
115.3 110.5
Long-term debt
Due to Magna December 31, 2004 77.4 75.1
Other 9.6 9.7
-------------------------------------------------------------------------
Net Debt $ 101.2 13% $ 168.2 23%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liability portion of Convertible Series
Preferred Shares, held by Magna
Current $ 167.4 $ 95.6
Long-term 61.0 116.2
-------------------------------------------------------------------------
$ 228.4 29% $ 211.8 28%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shareholders' equity
Debentures $ 66.2 9% $ -
Other 381.5 49% 362.7 49%
-------------------------------------------------------------------------
$ 447.7 58% $ 362.7 49%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Capitalization $ 777.3 100% $ 742.7 100%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company's Net Debt (including bank indebtedness, long-term debt
including current portion and debt due to Magna including current portion,
less cash and cash equivalents) plus the liability portions of the Convertible
Series Preferred Shares held by Magna to Total Capitalization (including net
debt, the liability portions of the Convertible Series Preferred Shares and
shareholders' equity), all as determined in accordance with Canadian GAAP, has
improved to 42% at March 31, 2003 compared to 51% at December 31, 2002. The
improvement is due to the issuance of the Debentures, income earned during the
period and from Net Debt repayments with the Debenture proceeds and the excess
of cash generated from operations over capital spending and dividends.
The Debentures and the Convertible Series Preferred Shares are all
convertible into Class A Subordinate Voting Shares at the holders' option at
fixed prices (Cdn$13.25 per share in the case of the Debentures, Cdn$10.07 per
share in the case of the Series 1, 2 and 3 Convertible Series Preferred Shares
and Cdn$13.20 per share in the case of the Series 4 and 5 Convertible Series
Preferred Shares). The Company's Class A Subordinate Voting Shares closed at
Cdn$10.84 on April 28, 2003 and have traded between Cdn$8.81 and Cdn$21.10
over the 52 week period ended April 28, 2003.
As a result, it is possible that all, or a portion, of the Debentures and
Convertible Series Preferred Shares will be settled with Class A Subordinate
Voting Shares if the holders exercise their fixed price conversion options.
The possible conversion of the Company's Debentures and Convertible Series
Preferred Shares into Class A Subordinate Voting Shares is reflected in the
Company's reported diluted earnings per share. The Company's Net Debt to Total
Capitalization at March 31, 2003 was 13%. This measure shows the Company's
conventional debt as a percentage of Total Capitalization and treats the
Company's hybrid Debenture and Convertible Series Preferred Share instruments
like equity rather than debt.
Should the holders of these instruments not exercise their fixed price
conversion options, they are entitled to receive cash on redemption or
maturity in the case of the Debentures (subject to the Company's option of
retiring the Debentures with Class A Subordinate Voting Shares in which case
the number of Class A Subordinate Voting Shares issuable is based on 95% of
the trading price of the Company's Class A Subordinate Voting Shares for the
20 consecutive trading days ending five trading days prior to the date fixed
for redemption or maturity) and on retraction in the case of the Convertible
Series Preferred Shares.
The Debentures mature on March 10, 2010 but are redeemable at the
Company's option between March 31, 2007 and March 31, 2008 if the weighted
average trading price of the Company's Class A Subordinate Voting Shares is
not less than Cdn$16.5625 for the 20 consecutive trading days ending five
trading days preceding the date on which notice of redemption is given.
Subsequent to March 31, 2008, all or part of the Debentures are redeemable at
the Company's option at any time.
Magna may retract the Convertible Series Preferred Shares for cash at
their face after June 30, 2003 in the case of the Series 1, 2 and 3
Convertible Series Preferred Shares, after December 31, 2003 in the case of
the Series 4 Convertible Series Preferred Shares and commencing December 31,
2004 in the case of the Series 5 Convertible Series Preferred Shares.
Accordingly, the liability portion of the Series 1, 2, 3 and 4 Convertible
Series Preferred Shares is shown as a current liability ($167.4 million at
March 31, 2003) and the liability portion of the Series 5 Convertible Series
Preferred Shares is shown as a long-term liability ($61.0 million at March 31,
2003) in the Company's consolidated balance sheet. The Company can call the
Series 1, 2 and 3 Convertible Series Preferred Shares for redemption
commencing July 31, 2003 and can call the Series 4 and 5 Convertible Series
Preferred Shares for redemption commencing December 31, 2005.
The Company's Net Debt plus the Debentures plus the liability portions of
the Convertible Series Preferred Shares to Total Capitalization at March 31,
2003 was 51%. This measure treats the Company's conventional debt and the
Company's Debentures and liability portions of the Convertible Series
Preferred Shares like debt rather than equity.
Unused and Available Financing Resources
At March 31, 2003 the Company had cash on hand of $138.8 million and
$277.3 million of unused and available credit facilities. $262.3 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 totals $115.3 million
including debt due to Magna of $40.9 million due June 30, 2003, $27.4 million
due July 1, 2003 and $38.7 million due October 1, 2003.
The amounts due June 30, 2003 and July 1, 2003 were originally due in
2001 and October 1, 2002, respectively. However, since the original maturity
dates, the Company, with Magna's consent, has been extending the repayment of
this debt at 90 day intervals at market interest rates. Although the Company
expects Magna to continue to extend the repayment dates for this debt, there
can be no assurance that Magna will continue to grant repayment extension
requests.
The Company anticipates that capital expenditures and currently scheduled
repayments of debt will exceed cash generated from operations in 2003. As a
result, the Company is dependent on its lenders to continue to revolve its
existing $300 million credit facility. In addition, the Company may seek
additional debt or equity financing and/or pursue further extensions of the
maturity dates of debt due to Magna.
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 companies 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 March 31, 2003,
$0.9 million had been advanced to tooling suppliers under the Company's
portion of this facility. This amount is included in accounts payable on the
Company's March 31, 2003 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, 2002, operating lease
commitments for facilities totalled $19.3 million for 2003 including
$10.1 million under lease arrangements with Magna. For 2007, total operating
lease commitments for facilities totalled $14.5 million including $9.8 million
under lease arrangements with Magna. In certain situations, the Company has
posted letters of credit to collateralize lease obligations.
The Company also has operating lease commitments for equipment. These
leases are generally of shorter duration. As of December 31, 2002, operating
lease commitments for equipment totalled $6.5 million for 2003. For 2007,
operating lease commitments for equipment totalled $3.1 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
29% for the year ended December 31, 2002. After tax return on common equity
for the three month period ended March 31, 2003 was 28%.
Each operating segment's return on investment is measured using return on
funds employed. Return on funds employed is defined as operating income plus
equity income 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
-------------- --------------
Three Month
Period Ended Year ended As at As at
(U.S. dollars March 31, December 31, March 31, December 31,
in millions) 2003 2002 2003 2002
-------------------------------------------------------------------------
North America 38% 35% $ 571.0 $ 569.3
Europe
Excluding Merplas 2% 1% 214.2 193.6
Merplas (58%) (66%) 26.1 26.9
Corporate n/a n/a 13.2 (0.1)
-------------------------------------------------------------------------
Global 23% 22% $ 824.5 $ 789.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Return on funds employed improved to 23% in the first quarter of 2003
compared to 22% for the year ended December 31, 2002. The improvement came in
both the North American segment, where operating income was strong, and in the
European segment, as 2002 was negatively impacted by the write-down of
United Kingdom goodwill and deferred preproduction expenditures (see note 2 to
the Company's consolidated financial statements for the year ended
December 31, 2002, included in the Company's Annual Report to Shareholders for
2002).
North America return on funds employed is likely to decline in the latter
part of 2003 as the Company makes significant construction and start-up
investments in its new Decostar facility which will launch in 2004.
Lower operating income combined with increased investments to support
future sales growth continues to negatively impact Europe's, excluding
Merplas, return on funds employed. The Company expects significant European,
excluding Merplas, sales growth over the next few years. 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 expects
that, once through this launch period, and as continuous improvement plans are
implemented at underperforming divisions, European operating income and return
on funds employed will begin to improve.
Improvements to Merplas' return on funds employed are dependent on
securing additional business to fill open capacity. Readers are asked to refer
to the "United Kingdom" section of this MD&A for further discussion regarding
Merplas.
2003 OUTLOOK
North American light vehicle production is estimated at 15.8 million
vehicles for 2003. The outlook for 2003 represents a reduction of 3% over 2002
vehicle production volumes of 16.3 million units.
Western European light vehicle production is estimated at 16.1 million
vehicles for 2003. The European production volume outlook is down 1% from 2002
European vehicle production volumes of 16.3 million units.
Decoma expects that, in addition to the impact of the above forecasted
declines in vehicle production volumes, North America sales and earnings will
be negatively impacted in the latter part of 2003 by increased spending at
Decostar as the Company prepares for the launch of this facility in 2004. In
addition, the impact of the changeover of a number of large production
programs serviced by Decoma including the DaimlerChrysler LH program which
comes to an end in the third quarter of 2003 and the new LX program does not
start up until the first quarter of 2004, the changeover of certain
General Motors fascia programs at the Company's Nascote and Polycon facilities
and the changeover of the Ford WIN126 (Windstar) to the V229 (Freestar)
program are expected to negatively impact 2003 North America sales and
earnings.
The negative impact on North America sales as a result of lower vehicle
production volumes and high content program changeovers will be partially
offset by a stronger Canadian dollar relative to the U.S. dollar in 2003
compared to 2002 and by the Company's recent acquisition of Federal Mogul's
original equipment automotive lighting operations in Matamoros, Mexico, a
distribution center in Brownsville, Texas, an assembly operation in Toledo,
Ohio and certain of the contracts and equipment at Federal Mogul's original
equipment automotive lighting operations in Hampton, Virginia. This
transaction closed on April 14, 2003 with a transition of the Hampton,
Virginia contracts and assets to occur subsequent to April 14, 2003. Once the
Hampton, Virginia contracts and assets are fully transitioned to Decoma, the
transaction is expected to generate approximately $55 million of sales on an
annualized basis.
European sales are expected to continue to be favourably impacted by a
stronger Euro and British Pound relative to the U.S. dollar in 2003 compared
to 2002. However, European earnings will continue to be negatively impacted by
costs associated with European sales growth and start up costs with the launch
of the Company's new paintline currently under construction in Belgium.
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, Merplas has been
separately disclosed in this MD&A in order to better explain the performance
of the European operating segment.
Merplas' longer term profitability is dependent on filling the facility's
open capacity. The Merplas facility was initially built to service the X400
program assembled at Jaguar's Halewood plant, and other Jaguar programs,
including the X100 program, with additional capacity to service other future
business opportunities. Production volumes on the Jaguar X400 and X100
programs continue at levels that are well below original planning volume
estimates. Our current 2003 forecast for X400 production is between 55,000 to
61,000 vehicles. 2003 production volume for the X100 program is currently
forecast at approximately 6,800 vehicles. This compares to approximately
72,800 and 6,800 vehicles built in 2002 for the X400 and X100, respectively.
Annual production volume estimates on these programs originally approximated
115,000 and 11,000, respectively.
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.
Merplas' operating loss improved to a loss of $3.8 million in the first
quarter of 2003 compared to a loss of $4.0 million in the first quarter of
2002. Although the loss remains significant, it has improved considerably from
a loss of $9.0 million in the second quarter of 2001 when the Jaguar X400
program launched. The reduction in operating losses is due to significant
operational improvements that have been implemented at Merplas since the
launch of the Jaguar X400 program. These improvements have been realized
despite continued declines in production volumes with the introduction of four
day weeks at Jaguar's Halewood assembly facility and by an extended two week
production shutdown in February 2003. Merplas' has also been negatively
impacted by recent pricing and volume reductions on certain Ford service part
programs. These production volume issues are evident in Merplas' production
sales which dropped to $6.6 million in the first quarter of 2003 compared to
production sales of $10.6 million in the first quarter of 2002.
-------------------------------------------------------------------------
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 the Private Securities Litigation Reform Act
of 1995. The words "estimate", "anticipate", "believe", "expect" and similar
expressions are intended to identify forward-looking statements. Persons
reading this MD&A are cautioned that such statements are only predictions and
that the Company's actual future results or performance may be materially
different. In evaluating such forward looking statements readers should
specifically consider the various risk factors which could cause actual events
or results to differ materially from those indicated by such forward looking
statements. These risks and uncertainties include, but are not limited to,
specific risks relating to the Company's relationship with its customers, the
automotive industry in general and the economy as a whole. Such risks include,
without limitation; the Company's reliance on its major OEM customers, pricing
concessions and cost absorptions required by the Company's customers; the
impact of production volumes and product mix on the Company's financial
performance, including changes in the actual customer production volumes
compared to original planning volumes; program delays and/or cancellations;
the extent, nature and duration of purchasing or leasing incentive programs
offered by automotive manufacturers and the impact of such programs on future
consumer demand; warranty, recall and product liability costs and risks; the
continuation and extent of automotive outsourcing by automotive manufacturers;
changes in vehicle pricing and the resulting impact on consumer demand; the
Company's operating and/or financial performance, including the affect of new
accounting standards that are promulgated from time to time (such as the
ongoing requirement for impairment testing of long lived assets) on the
Company's financial results; the Company's ability to finance its business
requirements and access capital markets; trade and labour issues or
disruptions impacting the Company's operations and those of its customers; the
Company's ability to identify, complete and integrate acquisitions and to
realize projected synergies relating thereto; the impact of environmental
related matters including emission regulations; risks associated with the
launch of new facilities, including cost overruns and construction delays;
technological developments by the Company's competitors; fluctuations in fuel
prices and availability; electricity and natural gas cost volatility;
government and regulatory policies and the Company's ability to anticipate or
respond to changes therein; the Company's relationship with Magna
International Inc.; currency exposure risk; fluctuations in interest rates;
changes in consumer and business confidence levels; consumer personal debt
levels; disruptions to the economy relating to acts of terrorism or war; and
other changes in the competitive environment in which the Company operates. In
addition, and without limiting the above, readers are cautioned that the
specific forward-looking statements contained herein relating to the Company's
vehicle production volume outlook; the anticipated impact on 2003 North
America sales and earnings of lower production volumes, Decostar spending, the
scheduled changeover of certain high content programs and the Federal Mogul
lighting acquisition; sales, operating income and return on funds employed
improvement opportunities in Europe; the possible conversion of the Company's
Debentures and Convertible Series Preferred Shares to Class A Subordinate
Voting Shares; the Company's ability to raise necessary future financing;
capital spending estimates; the future performance of Merplas; and the
recoverability of the Company's remaining goodwill and other long lived
assets, are all subject to significant risk and uncertainty. 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.
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