Decoma announces financial results for first quarter of fiscal 2004
Acquisitions and new facility start-ups contribute to strong
sales and content growth
May 3, 2004 - Decoma International Inc. (TSX:DEC.A; NASDAQ:DECA) today announced its financial results for the first quarter ended March 31, 2004.
<<
Financial Highlights
--------------------
Three Months
Ended March 31,
(US$, in millions, except per share figures) 2004 2003
Sales $702.4 $561.1
Operating income $ 46.6 $ 46.6
Net income $ 27.2 $ 27.1
Diluted earnings per share $ 0.27 $ 0.30
Weighted average diluted shares outstanding 106.3 98.4
Commenting on the above results, Al Power, Decoma's President and Chief
Executive Officer, noted: "We are very pleased with our growth in both sales
and content per vehicle during a period in which vehicle production volumes in both North America and Europe remained relatively flat. While costs associated with new facility start ups and program launches have in part reduced the impact of our sales increase on our bottom line in the short term, we believe these costs represent important investments in Decoma's long term growth and profitability".
Results of Operations
---------------------
Total sales for the first quarter of fiscal 2004 increased 25% to
$702.4 million from $561.1 million in the same period last year. Sales
benefited $63.9 million from currency translation. Excluding the impact of
currency translation, sales grew $77.4 million or 14% over Q1 2003. The
acquisition of the Federal Mogul lighting operations in the second quarter of
2003 and higher sales at recent new European facility start-ups accounted for
most of the sales increase.
For the three months ended March 31, 2004, vehicle production volumes
declined 1% in North America and increased 1% in Europe. Despite only a slight increase in overall volumes, Decoma's production sales increased 17% to $420.7 million in North America and 54% to $225.4 million in Europe. Average content per vehicle increased $15 or 17% to $102 in North America and grew $18 or 53% to $52 in Europe.
Operating income in the first quarter of 2004 was $46.6 million,
essentially unchanged from the first quarter of 2003. These results reflect
income on higher North American sales offset by higher operating losses in
Europe including costs incurred to support European sales growth and new
product launches, investments in new facilities and global pricing pressures.
Net income for the first quarter of 2004 was substantially unchanged at
$27.2 million compared with $27.1 million for the same period last year.
Diluted earnings per share declined to $0.27 from $0.30 in the first quarter
of 2003. Diluted earnings per share in the first quarter of 2003 benefited
$0.02 from other income. The remaining decline in diluted earnings per share
is primarily the result of an increase in the average number of diluted Class
A Subordinate Voting and Class B shares outstanding as compared with the same
period in 2003 as a result of the March 2003 Convertible Debenture issue.
Quarterly Dividend
------------------
Decoma's Board of Directors has declared a first quarter 2004 dividend of
US$0.07 per share on Class A Subordinate Voting and Class B shares payable on
June 15, 2004 to shareholders of record on May 28, 2004.
Outlook
-------
Commenting on the Company's outlook, Randy Smallbone, Decoma's Executive
Vice President, Finance and Chief Financial Officer, said: "As the year
progresses, we expect to gradually see the benefits of the investments and
strategic initiatives made in 2003, including the consolidation of our
European paint facilities outlined last quarter. We continue to introduce
innovative new products, secure new contracts in strategic areas, and are on
track to achieve our financial targets for 2004."
As previously announced, Decoma's North American content per vehicle for
fiscal 2004 is expected to be between $97 and $100, while European content per vehicle is expected to be between $52 and $56. Total sales are expected to range between $2.6 billion and $2.8 billion. These figures are based on
estimated 2004 light vehicle production of 16.0 million vehicles in North
America and 16.4 million vehicles in Western Europe. The Company's outlook
also assumes that average exchange rates for the Canadian dollar, Euro and
British Pound relative to the U.S. dollar will approximate the average
exchange rates experienced in the first quarter of 2004.
Annual General Meeting
----------------------
Decoma's Annual Meeting of Shareholders is being held today at 3:00 p.m.
at The Design Exchange, 234 Bay Street, Toronto. Shareholders and interested
parties are invited to listen to the audio webcast via the link on our home
page at www.decoma.com
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, 2002, 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 Statements" section of the MD&A for the three month period ended March 31, 2004, 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). Decoma has approximately
15,000 employees in 49 manufacturing, engineering and product development
facilities in Canada, the United States, Mexico, Germany, Belgium, England,
France, Austria, Poland, the Czech Republic and Japan.
Conference Call
---------------
-------------------------------------------------------------------------
Decoma management will hold a conference call to discuss its first
quarter results for 2004 on Tuesday, May 4, 2004 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.
-------------------------------------------------------------------------
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 MD&A attached to this release for a
more detailed discussion of the first quarter results for fiscal 2004.
<<
DECOMA INTERNATIONAL INC.
Consolidated Balance Sheets
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at As at
March 31, December 31,
2004 2003
(restated -
(U.S. dollars in thousands) see note 5)
-------------------------------------------------------------------------
ASSETS
-------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 75,171 $ 93,545
Accounts receivable 437,610 395,040
Inventories 225,386 216,502
Income taxes receivable 9,581 4,015
Prepaid expenses and other 21,082 18,267
-------------------------------------------------------------------------
768,830 727,369
-------------------------------------------------------------------------
Investments (note 5) 21,172 20,773
-------------------------------------------------------------------------
Fixed assets, net (note 5) 679,181 682,294
-------------------------------------------------------------------------
Goodwill, net 69,829 71,106
-------------------------------------------------------------------------
Future tax assets 6,797 10,556
-------------------------------------------------------------------------
Other assets 16,448 18,390
-------------------------------------------------------------------------
$ 1,562,257 $ 1,530,488
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------
Current liabilities:
Bank indebtedness (note 6(b)) $ 135,430 $ 177,288
Accounts payable 284,182 226,114
Accrued salaries and wages 73,913 68,298
Other accrued liabilities 87,296 77,260
Long-term debt due within one year 4,274 4,856
Debt due to Magna and its affiliates
within one year (note 6(c)) 133,834 141,804
Convertible Series Preferred Shares,
held by Magna (note 6(a)) 148,858 150,572
-------------------------------------------------------------------------
867,787 846,192
-------------------------------------------------------------------------
Long-term debt 10,532 11,194
-------------------------------------------------------------------------
Other long-term liabilities (note 5) 11,015 10,784
-------------------------------------------------------------------------
Future tax liabilities (note 5) 46,568 49,879
-------------------------------------------------------------------------
Shareholders' equity:
Convertible Debentures (note 12) 67,652 66,127
Convertible Series Preferred Shares (note 7) 7,309 8,826
Class A Subordinate Voting Shares (note 7) 287,139 287,137
Class B Shares (note 7) 30,594 30,594
Contributed surplus (note 5) 341 267
Retained earnings 175,782 155,975
Currency translation adjustment (note 5) 57,538 63,513
-------------------------------------------------------------------------
626,355 612,439
-------------------------------------------------------------------------
$ 1,562,257 $ 1,530,488
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Income and Retained Earnings
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Month Periods
Ended March 31,
-------------------------------------------------------------------------
2004 2003
(U.S. dollars, in thousands (restated -
except share and per share figures) see note 5)
-------------------------------------------------------------------------
Sales $ 702,409 $ 561,143
-------------------------------------------------------------------------
Cost of goods sold 578,148 447,675
Depreciation and amortization 24,098 20,320
Selling, general and administrative (notes 5 & 9) 46,266 40,367
Affiliation and social fees 7,297 6,180
-------------------------------------------------------------------------
Operating income 46,600 46,601
Equity income (603) (429)
Interest expense, net 2,690 2,749
Amortization of discount on Convertible Series
Preferred Shares, held by Magna 1,212 2,046
Other income (note 13) - (1,387)
-------------------------------------------------------------------------
Income before income taxes 43,301 43,622
Income taxes 16,091 16,560
-------------------------------------------------------------------------
Net income $ 27,210 $ 27,062
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financing charges on Convertible Series
Preferred Shares held by Magna and Convertible
Debentures, net of taxes (note 12) $ (1,557) $ (1,464)
-------------------------------------------------------------------------
Net income attributable to Class A Subordinate
Voting and Class B Shares 25,653 25,598
Retained earnings, beginning of period 156,984 111,450
Dividends on Class A Subordinate Voting and
Class B Shares (5,846) (4,084)
Adjustment for change in accounting policy for
asset retirement obligations (note 5) (1,009) (735)
-------------------------------------------------------------------------
Retained earnings, end of period $ 175,782 $ 132,229
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per Class A Subordinate Voting
or Class B Share
Basic $ 0.31 $ 0.38
Diluted $ 0.27 $ 0.30
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A Subordinate Voting
and Class B Shares outstanding (in thousands)
Basic 83,508 68,063
Diluted 106,331 98,449
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Month Periods
Ended March 31,
-------------------------------------------------------------------------
2004 2003
(restated -
(U.S. dollars, in thousands) see note 5)
-------------------------------------------------------------------------
Cash provided from (used for):
OPERATING ACTIVITIES
Net income $ 27,210 $ 27,062
Items not involving current cash flows 28,603 20,084
-------------------------------------------------------------------------
55,813 47,146
Changes in non-cash working capital 9,468 (3,493)
-------------------------------------------------------------------------
65,281 43,653
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Fixed asset additions (32,208) (27,564)
Increase in investments and other assets (633) (702)
Proceeds from disposition of fixed and other assets 72 250
-------------------------------------------------------------------------
(32,769) (28,016)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Decrease in bank indebtedness (38,239) (19,667)
Repayments of debt due to Magna and its affiliates (3,569) (25)
Decrease in long term debt (613) (411)
Issuance of Convertible Debentures (note 12) - 66,128
Dividends on Convertible Series Preferred Shares (2,162) (3,141)
Dividends on Class A Subordinate Voting and
Class B Shares (5,846) (4,084)
-------------------------------------------------------------------------
(50,429) 38,800
-------------------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents (457) 2,321
-------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents during the period (18,374) 56,758
Cash and cash equivalents, beginning of period 93,545 82,059
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 75,171 $ 138,817
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
DECOMA INTERNATIONAL INC.
Notes to Consolidated Financial Statements
(Unaudited)
Three month periods ended March 31, 2004 and 2003
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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, 2003 (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, 2004 and the results of its
operations and cash flows for the three month periods ended March 31,
2004 and 2003.
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 reported amounts of assets and
liabilities; the disclosure of contingent assets and liabilities at the
date of the unaudited interim consolidated financial statements; and the
reported amounts of revenue and expenses during the period. 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. Accounting Policy Changes
Stock-based Compensation
As provided for by new accounting recommendations of The Canadian
Institute of Chartered Accountants (the "CICA"), the fair value of stock
options granted, modified or settled on or after January 1, 2003 is
recognized on a straight-line basis over the applicable stock option
vesting period as compensation expense in selling, general and
administrative expenses in the consolidated statements of income. For
stock options granted prior to January 1, 2003 which are not accounted
for at fair value, pro forma earnings disclosure showing the impact of
fair value accounting is included in note 8. The impact of this
accounting policy change on reported net income and earnings per share is
as follows:
Three Month Periods
Ended March 31,
-------------------------
(U.S. dollars except per share figures) 2004 2003
-------------------------------------------------------------------------
Increase in selling, general and
administrative expenses $ 74 $ 67
-------------------------------------------------------------------------
Reduction of net income $ 74 $ 67
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reduction of earnings per Class A Subordinate
Voting or Class B Share
Basic $ - $ -
Diluted $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Asset Retirement Obligations
As provided for by new accounting recommendations of the CICA, the
Company is required to estimate and accrue for the present value of its
obligations to restore leased premises at the end of the lease. At lease
inception, the present value of this obligation is recognized as other
long-term liabilities with a corresponding amount recognized in fixed
assets. The fixed asset amount is amortized, and the liability amount is
accreted, over the period from lease inception to the time the Company
expects to vacate the premises resulting in both depreciation and
additional rent in cost of sales in the consolidated statements of
income.
These requirements were adopted by the Company on January 1, 2004 with
retroactive restatement. As a result, for the three month period ended
March 31, 2003 opening retained earnings was reduced by $735,000 and net
income was reduced by $61,000. Basic and diluted earnings per share were
unchanged.
At December 31, 2003 investments were reduced by $8,000, fixed assets
were increased by $1,797,000, other long term liabilities were increased
by $3,322,000, future tax liabilities were reduced by $335,000, retained
earnings was reduced by $1,009,000 and the currency translation
adjustment account decreased by $189,000.
Net income for the three month period ended March 31, 2004 was reduced by
$83,000.
Separately Priced Tooling Contracts
The Company adopted CICA Emerging Issues Committee Abstract No. 142,
"Revenue Arrangements with Multiple Deliverables" (EIC-142),
prospectively for new revenue arrangements with multiple deliverables
entered into by the Company on or after January 1, 2004. The Company
enters into such multiple element arrangements where it has separately
priced tooling contracts that are entered into at the same time as
contracts for subsequent parts production. EIC-142 addresses how a vendor
determines whether an arrangement involving multiple deliverables
contains more than one unit of accounting and also addresses how
consideration should be measured and allocated to the separate units of
accounting in the arrangement. Separately priced tooling can be accounted
for as a separate revenue element only in circumstances where the tooling
has value to the customer on a standalone basis and there is objective
and reliable evidence of the fair value of the subsequent parts
production. The adoption of EIC-142 did not have a material effect on the
Company's revenue or earnings for the three month period ended March 31,
2004.
6. Debt
(a) Convertible Series Preferred Shares
The liability amounts for the Series 4 and 5 Convertible Series Preferred
Shares are presented as current liabilities. The Series 4 Convertible
Series Preferred Shares are retractable at any time by Magna
International Inc. ("Magna") at their aggregate face value of
Cdn$100 million and the Series 5 Convertible Series Preferred are
retractable by Magna at their aggregate face value of Cdn$100 million
commencing December 31, 2004.
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 and are redeemable by the Company commencing December 31, 2005.
(b) Credit Facility
At March 31, 2004 the Company had lines of credit totaling
$314.8 million. Of this amount, $300 million is represented by an
extendible, revolving credit facility that expires on May 27, 2004, 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, 2004 were approximately $164.6 million.
(c) Debt Due to Magna and its Affiliates
The Company's debt due to Magna and its affiliates consists of the
following:
-------------------------------------------------------------------------
March 31, December 31,
(U.S. dollars in thousands) 2004 2003
-------------------------------------------------------------------------
Debt denominated in Canadian dollars (i) $ 45,606 $ 46,512
Debt denominated in Euros (ii) 87,145 94,128
Capital lease obligation denominated in Euros 1,083 1,164
-------------------------------------------------------------------------
133,834 141,804
Less due within one year 133,834 141,804
-------------------------------------------------------------------------
$ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Notes:
(i) 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 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,
4.25% effective April 1, 2003, 4.19% effective July 1, 2003,
3.86% effective October 1, 2003, 3.65% effective January 1,
2004 and 3.07% effective April 1, 2004. The maturity date of
the Cdn$60 million debt has been extended to June 30, 2004.
(ii) This debt, comprised of three tranches, initially bore
interest at 7.0%, 7.0% and 7.5%, respectively, and was
repayable October 1, 2002, October 1, 2003 and December 31,
2004, respectively. The maturity date and the interest rate
on the first tranche was renegotiated to 4.29% effective
October 2, 2002, 3.86% effective January 2, 2003, 3.51%
effective April 2, 2003, 3.14% effective July 2, 2003 and
3.32% effective October 2, 2003. The maturity date and the
interest rate on the second tranche was renegotiated to 3.32%
effective October 2, 2003. Substantially all of the first and
second tranches were repaid in December 2003. The remaining
portions of the first and second tranches outstanding at
December 31, 2003 were repaid in January 2004. The third and
final tranche of this debt, totaling Euro 72.0 million,
continues to be due December 31, 2004 and bears interest at its
original rate of 7.5%.
7. Capital Stock
Class and Series of Outstanding Securities
For details concerning the nature of the Company's securities, refer to
note 11, "Convertible Series Preferred Shares Held by Magna", and
note 14, "Capital Stock", of the Company's annual financial statements.
The following table summarizes the outstanding share capital of the
Company:
-------------------------------------------------------------------------
Authorized Issued
-------------------------------------------------------------------------
Convertible Series Preferred Shares
(Convertible into Class A Subordinate
Voting Shares) 3,500,000 2,000,000
Preferred Shares, issuable in series Unlimited -
Class A Subordinate Voting Shares Unlimited 51,598,778
Class B Shares
(Convertible into Class A Subordinate
Voting Shares) Unlimited 31,909,091
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Maximum Shares
The following table presents the maximum number of shares that would be
outstanding if all of the outstanding options, Convertible Series
Preferred Shares and Convertible Debentures issued and outstanding as at
March 31, 2004 were exercised or converted:
-------------------------------------------------------------------------
Number of Shares
-------------------------------------------------------------------------
Class A Subordinate Voting Shares outstanding
at March 31, 2004 51,598,778
Class B Shares outstanding at March 31, 2004 31,909,091
Options to purchase Class A Subordinate Voting Shares 2,855,000
Convertible Debentures, convertible by the holders
at Cdn$13.25 per share 7,547,019
Convertible Series Preferred Shares, convertible
at Cdn$13.20 per share 15,151,516
-------------------------------------------------------------------------
109,061,404
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The above amounts include shares issuable if the holders of the
Convertible 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 Convertible 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 Convertible Debenture
interest and principal with shares.
8. Incentive Stock Options
Information concerning the Company's Incentive Stock Option Plan is
included in note 15, "Incentive Stock Options", of the Company's annual
financial statements. The following is a continuity schedule of options
outstanding:
-------------------------------------------------------------------------
Weighted
Average Number of
Exercise Options
Number Price Exercisable
-------------------------------------------------------------------------
Outstanding
at December 31, 2003 2,640,000 Cdn$13.02 1,779,000
Granted 330,000 Cdn$11.79 -
Cancelled (115,000) Cdn$13.06 (57,000)
Vested 161,000
-------------------------------------------------------------------------
Outstanding at March 31, 2004 2,855,000 Cdn$12.88 1,883,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The maximum number of shares reserved to be issued for stock options is
4,100,000 Class A Subordinate Voting Shares. The number of reserved but
unoptioned shares at March 31, 2004 is 1,193,750. 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:
-------------------------------------------------------------------------
Three Month Periods
Ended March 31,
-------------------------------------------------------------------------
(U.S. dollars, in thousands) 2004 2003
-------------------------------------------------------------------------
Risk free interest rate 2.8% 3.0%
Expected dividend yield 3.0% 3.2%
Expected volatility 37% 39%
Expected life of options 5 years 5 years
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options granted prior to January 1, 2003 are not accounted for at
fair value. Had these stock options been accounted for at fair value, the
Company's net income attributable to Class A Subordinate Voting and
Class B Shares would have been:
--------------------------------------------------------------------------
Three Month Periods
Ended March 31,
-------------------------------------------------------------------------
(U.S. dollars, in thousands except per
share figures) 2004 2003
-------------------------------------------------------------------------
Net income attributable to Class A
Subordinate Voting and Class B Shares $ 25,653 $ 25,598
Pro forma adjustments for the fair value of
stock options granted prior to January 1, 2003 (108) (213)
-------------------------------------------------------------------------
Pro forma net income attributable to Class A
Subordinate Voting and Class B Shares $ 25,545 $ 25,385
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pro forma earnings per Class A Subordinate
Voting or Class B Share
Basic $ 0.31 $ 0.37
Diluted $ 0.27 $ 0.29
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. Foreign Exchange
Selling, general and administrative expenses are net of earnings (losses)
resulting from foreign exchange of:
-------------------------------------------------------------------------
Three Month Periods
Ended March 31,
-------------------------------------------------------------------------
(U.S. dollars, in thousands) 2004 2003
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Foreign exchange income (losses) $ 239 $ (2,632)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. 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.
Ford Motor Company ("Ford") recently updated its Production Purchasing
Global Terms and Conditions (the "Global Terms") effective for shipments
from Decoma International Corp. ("DIC") and its subsidiaries
(collectively the "Supplier") to Ford on or after January 1, 2004. DIC is
a direct significant subsidiary of Decoma International Inc. Under the
Global Terms, Ford and its "related companies" (collectively the "Ford
Group" or the "Buyer") have the right to set off against the Supplier's
receivables from the Ford Group amounts owing to the Ford Group by the
Supplier's "related companies". "Related companies" is defined under the
Global Terms to include any parent company of the Buyer or the Supplier,
as appropriate, and any subsidiary or affiliate in which any of them owns
or controls at least 25% of the voting stock, partnership interest or
other ownership interest.
Where DIC acts as a "Supplier", Decoma interprets the Global Terms to
mean that "related companies" would include Decoma International Inc. (as
the parent company of DIC) and its direct and indirect subsidiaries and
at least 25% owned entities (collectively the "Decoma Group") but would
not include Magna and its direct and indirect subsidiaries and at least
25% owned entities other than the Decoma Group (collectively the "Magna
Group").
Ford may assert that the term "related companies" includes, in relation
to DIC or other Suppliers in the Decoma Group, the Magna Group and
attempt to set off a Magna Group liability against a Decoma Group
receivable. To date, Ford has not attempted to take such action against
Decoma and Decoma is not aware of any existing material liability of the
Magna Group to the Ford Group which could be applied by the Ford Group in
such a manner. If the Ford Group took such an action against Decoma in
respect of a material liability of the Magna Group, such action could
have a material adverse impact on Decoma's financial condition and
liquidity. Any such action by Ford would be contested by Decoma at such
time.
11. Continental Europe Paint Capacity Consolidation Charges
During the three month period ended December 31, 2003, the Company
completed, and committed to, a plan to consolidate its continental Europe
paint capacity. This plan entails mothballing the Company's Decoform
paint line in Germany and transferring Decoform's painted trim and fascia
business to the Company's newer paint lines at its Decorate and Belplas
facilities in Germany and Belgium, respectively. Decoform will continue
to mold and assemble products for the Company's Decorate facility.
The consolidation will result in severance costs associated with a
reduction of the Decoform workforce of 284 employees which were accrued
in the three month period ended December 31, 2003.
Decoform employees have a contractual notice period of up to two quarters
following the quarter in which individual notice is given. The
consolidation plan envisions substantially all employees working through
their contractual notice periods with paint line production transfers
completed by the end of 2004.
A continuity of the severance accrual related to this consolidation plan
is as follows:
(U.S. dollars, in thousands)
-------------------------------------------------------------------------
Balance, December 31, 2003 $ 6,799
Payments (50)
Currency translation (258)
-------------------------------------------------------------------------
Balance, March 31, 2004 $ 6,491
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. Convertible Debentures
On March 27, 2003, the Company issued Cdn$100 million of unsecured,
subordinated Convertible Debentures bearing interest at 6.5% and maturing
March 31, 2010. See note 13 to the Company's annual financial statements
for further discussion on the Convertible Debentures.
13. Other Income
During the three month period ended March 31, 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,
totaling $1.4 million, has been included in other income and is not
subject to tax.
14. Segmented Information
The Company operates in one industry segment, the automotive exteriors
business. As at March 31, 2004, the Company had 27 manufacturing
facilities in North America and 14 in Europe. In addition, the Company
had 8 product development and engineering centres.
The Company's European divisions operate 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, 2004
-------------------------------------------------------------------------
(U.S. dollars in North
thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $ 458,514 $ 244,396 $ - $ 702,910
Inter-segment sales (6) (495) - (501)
-------------------------------------------------------------------------
Sales to external
customers $ 458,508 $ 243,901 $ - $ 702,409
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization $ 16,824 $ 7,274 $ - $ 24,098
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating
income (loss) $ 59,403 $ (10,712) $ (2,091) $ 46,600
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Equity income $ (603) $ - $ - $ (603)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense
(income), net $ 14,102 $ 2,074 $ (13,486) $ 2,690
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares,
Held by Magna $ - $ - $ 1,212 $ 1,212
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, net $ 444,838 $ 234,343 $ - $ 679,181
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed asset additions $ 15,168 $ 17,040 $ - $ 32,208
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill, net $ 49,577 $ 20,252 $ - $ 69,829
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Month Period Ended March 31, 2003
-------------------------------------------------------------------------
(U.S. dollars in North
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 $ 14,174 $ 6,146 $ - $ 20,320
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating
income (loss) $ 53,975 $ (2,812) $ (4,562) $ 46,601
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Equity income $ (429) $ - $ - $ (429)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense
(income), net $ 5,889 $ 4,336 $ (7,476) $ 2,749
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares,
Held by Magna $ - $ - $ 2,046 $ 2,046
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other income
(note 13) $ - $ - $ (1,387) $ (1,387)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, net $ 378,357 $ 171,016 $ - $ 549,373
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed asset additions $ 20,814 $ 6,750 $ - $ 27,564
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill, net $ 46,457 $ 18,044 $ - $ 64,501
-------------------------------------------------------------------------
-------------------------------------------------------------------------
DECOMA INTERNATIONAL INC.
Management's Discussion and Analysis of Results of Operations
and Financial Position
Three month periods ended March 31, 2004 and 2003
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 is current as of May 3, 2004 and should be read in
conjunction with the Company's unaudited interim consolidated financial
statements for the three month period ended March 31, 2004, included elsewhere
herein, and the Company's consolidated financial statements and MD&A for the
year ended December 31, 2003, included in the Company's Annual Report to
Shareholders for 2003. Additional information relating to the Company,
including the Company's Annual Information Form, is available on SEDAR at www.sedar.com
Impact of Translation of Foreign Currency Results of Operations into the
Company's U.S. Dollar Reporting Currency
-------------------------------------------------------------------------
Three Month Periods Ended
March 31,
----------------------------
%
2004 2003 Change
-------------------------------------------------------------------------
1 Cdn dollar equals U.S. dollars 0.758 0.662 14.5%
1 Euro equals U.S. dollars 1.248 1.073 16.3%
1 British Pound equals U.S. dollars 1.840 1.602 14.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 of operations.
The results of foreign operations are translated into U.S. dollars using
the average exchange rates in the table above for the relevant period.
Throughout this MD&A reference is made to the impact of translation of foreign
operations on reported U.S. dollar amounts where significant.
In addition to the impact of movements in exchange rates on translation
of foreign operations into U.S. dollars, the Company's results can also be
influenced by the impact of movements in exchange rates on foreign currency
transactions (such as raw material purchases denominated in foreign
currencies). However, as a result of hedging programs employed by the Company,
foreign currency transactions in the current period have not been fully
impacted by the movements in exchange rates. The Company records foreign
currency transactions at the hedged rate.
Finally, holding gains and losses on foreign currency denominated
monetary items, which are recorded in selling, general and administrative
expenses, impact reported results. This MD&A makes reference to the impact of
these amounts where significant.
OVERVIEW
Total sales grew to $702.4 million in the first quarter of 2004 compared
to $561.1 million for the first quarter of 2003. Total sales benefited
$63.9 million from translation. Excluding the impact of translation, total
sales increased $77.4 million or 14% over the first quarter of 2003 due
primarily to the acquisition of certain of Federal Mogul's original equipment
automotive lighting operations (the "FM Lighting Acquisition") in the second
quarter of 2003 and sales at recent new European facility start ups.
Excluding other income, diluted earnings per share declined $0.01 in the
first quarter of 2004 compared to the first quarter of 2003. This decline is
primarily attributable to an increase in the average number of diluted Class A
Subordinate Voting and Class B Shares outstanding due to the issuance in March
2003 of Cdn$100 million of 6.5% convertible unsecured subordinated debentures
(the "Convertible Debentures") and to the issuance of 548,600 Class A
Subordinate Voting Shares to the Decoma employee deferred profit sharing
program during the second quarter of 2003.
RESULTS OF OPERATIONS
Three Month Periods Ended March 31, 2004 and 2003
Sales
-------------------------------------------------------------------------
Three Month Periods Ended
March 31,
----------------------------
%
2004 2003 Change
-------------------------------------------------------------------------
Light Vehicle Production Volumes
(in millions)
North America 4.134 4.152 -%
Western Europe 4.342 4.279 1%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Content Per Vehicle (U.S. dollars)
North America $ 102 $ 87 17%
Europe 52 34 53%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Production Sales (U.S. dollars in millions)
North America $420.7 $359.7 17%
Europe 225.4 146.5 54%
Global Tooling and Other Sales 56.3 54.9 3%
-------------------------------------------------------------------------
Total Sales $702.4 $561.1 25%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average content per vehicle in North America and in Europe has been
calculated by dividing the Company's North American and European production
sales by the industry's North American and western European light vehicle
production volumes, respectively. Excluding the effects of translation,
continued growth in average content per vehicle provides a measure of the
Company's ability to sell its products onto new vehicle platforms and/or
expand its sales onto existing vehicle platforms. Increases in average content
per vehicle may result from any one or more of: the award of takeover
business; the acquisition of competitors; the expansion of the Company's
existing product markets (i.e. the conversion of bumpers from steel to
plastic); and the introduction of new products.
North America
North American production sales grew by 17% to $420.7 million in the
first quarter of 2004. North American vehicle production volumes were
substantially unchanged. However, North American average content per vehicle
grew $15 or 17% to approximately $102.
Translation of Canadian dollar sales into the Company's U.S. dollar
reporting currency added approximately $32.9 million to production sales and
$8 to North American content per vehicle. In addition, the FM Lighting
Acquisition added approximately $18.2 million to production sales and $4 to
North American content per vehicle.
The remaining net $9.9 million increase in production sales and $3
increase in North American content per vehicle was due to:
- new takeover business including fascia programs for the GMX 230
(Monte Carlo) and certain GMX 210 (Impala) models as well as certain
General Motors lighting and Ford running board programs;
- sales on programs that launched during or subsequent to the first
quarter of 2003 including the General Motors GMX 367 (Grand Prix) and
the GMX 380 (Malibu) programs;
- increased content on the Ford U204 (Escape) refresh program; and
- strong volumes on other high content production programs including
the General Motors GMX 210 (Impala) and GMX 320 (Cadillac CTS)
programs, the DaimlerChrysler DR (Ram pickup) program and the Ford
EN114 (Crown Victoria, Grand Marquis) and various truck programs.
These increases were partially offset by:
- end of production on the DaimlerChrysler LH (Concorde, Intrepid and
300M) program and start up of the new Daimler Chrysler LX program in
the first quarter of 2004;
- lower production volumes as a result of end of production on the Ford
WIN 126 (Windstar) program and the award of the replacement V229
(Freestar) fascia program to a competitor; and
- lower production volumes on certain other long running high content
programs including the Ford U152 (Explorer) programs.
Europe
European production sales increased 54% to $225.4 million in the first
quarter of 2004 on substantially level production volumes. European average
content per vehicle grew $18 or 53% to approximately $52 for the first quarter
of 2004. Content growth was driven by the translation of Euro and British
Pound sales into the Company's U.S. dollar reporting currency. This added
approximately $23.4 million to European production sales and $5 to European
content per vehicle.
Content growth was also driven by the ramp up of sales at recent new
facility start ups including the launch of the VW Group A5 (Golf) program in
the fourth quarter of 2003 with fascia production at the Company's new Belplas
paint line and front end module assembly and sequencing at the Company's new
Brussels Sequencing Centre; the ramp up of the VW Group T5 (Transit Van)
fascia and front end module assembly and sequencing program at the Company's
Modultec and Formatex facilities in Germany and Poland; and the ramp up of the
DaimlerChrysler Mercedes E Class 4 Matic front end module assembly and
sequencing program at the Company's Graz, Austria facility. Sales at these
facilities collectively added approximately $52.8 million to production sales
and $12 to European content per vehicle.
The remaining net $2.7 million increase in production sales and $1
increase in content per vehicle are due to a number of factors including an
increase in sales at Merplas resulting primarily from increased production
volumes on the Jaguar X400 program. Adjusting to eliminate the impact of
translation of British Pound sales into U.S. dollars, Merplas' sales increased
$5.2 million. Increased sales from other new program launches, including
various Audi and Porsche programs, and strong BMW Mini volumes were offset by
lower volumes on certain long running high content programs such as the Ford
Mondeo and various Rover programs.
Global Tooling and Other
Tooling and other sales on a global basis were substantially unchanged at
$56.3 million for the first quarter of 2004.
Sales by Customer
The Company's sales by customer breakdown for the three month periods
ended March 31, 2004 and 2003 were as follows:
-------------------------------------------------------------------------
Three Month Periods Three Month Periods
Ended March 31, 2004 Ended March 31, 2003
------------------------- ----------------------
North North
America Europe Global America Europe Global
Traditional "Big 3" Brands
Ford 22.9% 1.8% 24.7% 28.5% 2.0% 30.5%
GM / Opel / Vauxhall 23.9% 2.2% 26.1% 22.6% 2.1% 24.7%
Chrysler 9.9% 0.6% 10.5% 12.2% 1.0% 13.2%
-------------------------------------------------------------------------
56.7% 4.6% 61.3% 63.3% 5.1% 68.4%
VW Group - 13.4% 13.4% 0.1% 5.6% 5.7%
Mercedes - 6.9% 6.9% - 9.5% 9.5%
BMW 0.3% 1.6% 1.9% 0.7% 1.8% 2.5%
Ford Premier Automotive
Group ("Ford PAG") 0.1% 2.4% 2.5% - 2.0% 2.0%
Renault Nissan 1.8% 0.5% 2.3% 1.2% 0.5% 1.7%
Other 6.3% 5.4% 11.7% 4.9% 5.3% 10.2%
-------------------------------------------------------------------------
65.2% 34.8% 100.0% 70.2% 29.8% 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) Included above are sales
to Asian new domestics 4.7% 0.3% 5.0% 3.5% 0.1% 3.6%
The Company continues to grow its sales with original equipment
manufacturer ("OEM") customers outside the traditional "Big 3" automotive
brands.
The growth in sales to the VW Group is the result of the launch of the VW
Group T5 (Transit Van) and A5 (Golf) fascia and front end module programs
noted above and the recent launch of a number of new Audi programs. Sales to
Mercedes are expected to grow with the launch of both the A Class front end
module program in the second half of 2004 at Carmodul with related fascia
production at Innoplas and the launch of the Mercedes W/X 164 and V/W 251
programs at Decostar in 2005.
The Company's largest production sales programs for 2004 in each of North
America and Europe are expected to include:
North America
- Ford U152 (Explorer)
- General Motors GMX 210 (Impala)
- DaimlerChrysler LX (Concorde, Intrepid and 300M)
- DaimlerChrysler JR (Stratus, Sebring and Sebring Convertible)
- Ford EN114 (Crown Victoria and Grand Marquis)
Europe
- VW Group T5 (Transit Van) (front end module)
- VW Group A5 (Golf) (front end module)
- DaimlerChrysler Mercedes C Class
- Opel Epsilon
- VW Group SLW (City Car) (front end module)
Gross Margin
Gross margin increased to $124.3 million in the first quarter of 2004
compared to $113.5 million in the first quarter of 2003. As a percentage of
total sales, gross margin declined to 17.7% for the current quarter compared
to 20.2% for the first quarter of 2003.
The gross margin percentage in North America declined to 24.2% in the
current quarter compared to 24.7% in the first quarter of 2003. The Company's
ongoing continuous improvement programs, favourable purchase price variances
on net U.S. dollar purchases within the Company's Canadian operations and
increased claims for eligible research and development investment tax credits
enabled the North American segment to partially offset the impact of OEM price
concessions; the start up of the DaimlerChrysler LX program; spending at the
Company's Decostar facility; and operating inefficiencies in the current
quarter at two of the Company's trim product plants.
European gross margin declined to 5.5% in the first quarter of 2004
compared to 9.7% in the first quarter of 2003. The decline in the European
gross margin percentage is due primarily to new facility start ups and the
growth in front end module assembly and sequencing sales and the lower margins
associated with purchased components. In addition to the Company's new Belplas
paint line, Brussels Sequencing Centre, Graz, Modultec and Formatex facilities
described earlier, the Company completed the acquisition of HDO Galvano und
Oberflachentechnik GmbH ("HDO") during the fourth quarter of 2003. HDO
operated a chroming line adjacent to the Company's Idoplas facility in
Germany. This line has been converted to allow for grille chroming and has
been integrated into Idoplas' operations. The current quarter was negatively
impacted by new chroming line start up and launch costs. European gross
margins also continue to be negatively impacted by costs related to the
DaimlerChrysler Mercedes A Class program which will launch in the second half
of 2004 including costs to ready Carmodul, the Company's new front end module
assembly and sequencing facility, for this launch. Launch costs associated
with various new Audi and Porsche programs, OEM pricing concessions and
continued operating inefficiencies and other performance issues at the
Company's Prometall facility also negatively impacted gross margin in the
quarter. These negative impacts were partially offset by improvements at
Merplas and the Company's paint operations at its Decorate trim facility.
The competitive environment within the automotive industry continues to
cause the Company's customers to increase pressure for price concessions and
to finance or absorb more engineering costs related to product design, tooling
costs and certain capital and other items. Although the Company has been
largely successful in the past in responding to these pressures through
improved operating efficiencies and cost reductions, customer pressure for
price concessions has intensified in recent quarters. The Company remains
highly focused on continuous improvement activities, however, continued
significant incremental price concessions could have further adverse impacts
on the Company's gross margin percentage.
Depreciation and Amortization
Depreciation and amortization costs increased to $24.1 million for the
first quarter of 2004 from $20.3 million for the comparative prior year
period. Of this increase, $2.1 million is attributable to the translation of
Canadian dollar, Euro and British Pound depreciation expense into the
Company's U.S. dollar reporting currency. The Company's ongoing capital
spending program also contributed to increased depreciation expense
including the commencement of depreciation at the Company's new Belplas
paint line in the fourth quarter of 2003. These increases were partially
offset by a reduction in Sybex depreciation expense as a result of the
United Kingdom impairment charge taken in the fourth quarter of 2003 which
is expected to reduce full year 2004 depreciation expense by approximately
$2.5 million. Readers are asked to refer to the Company's MD&A for the year
ended December 31, 2003 for further discussion regarding the United Kingdom
impairment charge.
Depreciation as a percentage of total sales declined to 3.4% in the
current quarter compared to 3.6% for the first quarter of 2003.
Depreciation on capital invested at Decostar will not commence until
commercial production begins in 2005.
Selling, General and Administrative ("S,G&A")
S,G&A costs were $46.3 million for the first quarter of 2004, up from
$40.3 million for the first quarter of 2003. 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 which increased reported S,G&A costs
by $4.5 million. This increase was partially offset by a $2.9 million decline
in foreign exchange losses which were high in 2003 as a result of U.S. dollar
denominated monetary items held in Canada and the strengthening of the
Canadian dollar relative to the U.S. dollar.
The remaining $4.4 million increase in S,G&A expense is related primarily
to the Company's Belplas paint line launch and Brussels Sequencing Centre
takeover; the new chrome line start up and launch in Europe; the FM Lighting
Acquisition; and increased costs within the Company's systems integration
operation as a result of increased front end and lift gate module program
quoting activity.
The impact of the Company's change in accounting policy to expense stock
options granted on or after January 1, 2003 has been applied retroactively and
therefore did not contribute to the increase in SG&A expense (readers are
asked to refer to note 5 to the Company's unaudited interim consolidated
financial statements for the three month period ended March 31, 2004, included
elsewhere herein).
As a percentage of total sales, S,G&A declined to 6.6% for the current
quarter compared to 7.2% for the first quarter of 2003.
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, treasury, information systems (including wide
area network infrastructure and support services) and employee relations
services (including administration of Decoma's Employee Equity Participation
and Profit Sharing Program), in return for a specific amount negotiated
between the Company and Magna. This amount includes an allocated share of the
facility and overhead costs dedicated to providing such services. The Company
is currently in discussions with Magna with respect to a formal long-term
agreement detailing these arrangements. The cost of management and
administrative services provided by Magna and included in S,G&A was $0.7
million compared to $0.9 million for the first quarters of 2004 and 2003,
respectively.
Affiliation and Social Fees
The Company is party to an affiliation agreement with Magna that provides
for the payment by Decoma of an affiliation fee. The affiliation agreement
provides the Company with, amongst other things, certain trademark rights,
access to Magna's management and to its operating principles and policies,
internal audit services, Tier 1 development assistance, global expansion
assistance, vehicle system integration and modular product strategy assistance
and sharing of best practices in areas such as new management techniques,
employee benefits and programs, marketing and technology development
initiatives.
Affiliation fees payable under the affiliation agreement are 1% of
Decoma's consolidated net sales (as defined in the agreement) less 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.
In addition, 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 fees expense increased to $7.3 million from $6.2
million for the first quarters of 2004 and 2003, respectively. The increase in
affiliation and social fees expense is the result of an increase in
consolidated net sales on which the affiliation fees are calculated.
Affiliation and social fee expense as a percentage of total sales
declined to 1.0% in the current quarter compared to 1.1% in the first quarter
of 2003 due to the affiliation fee holiday described above on consolidated net
sales derived from business acquisitions.
Operating Income
-------------------------------------------------------------------------
Three Month Periods Ended
March 31,
----------------------------
%
(U.S. dollars in millions) 2004 2003 Change
-------------------------------------------------------------------------
Operating Income
North America $ 59.4 $ 54.0 10%
Europe (10.7) (2.8)
Corporate (2.1) (4.6)
-------------------------------------------------------------------------
Total Operating Income $ 46.6 $ 46.6 - %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a percentage of total sales, operating income was 6.6% for the first
quarter of 2004 compared to 8.3% for the first quarter of 2003.
The decline in the corporate segment operating loss is primarily
attributable to a $1.9 million reduction in foreign exchange losses which were
high in 2003 as a result of U.S. dollar denominated monetary items held in
Canada and the strengthening of the Canadian dollar relative to the U.S.
dollar.
North America
North American operating income increased to $59.4 million from $54.0
million for the first quarters of 2004 and 2003, respectively. As a percentage
of total North American sales, North American operating income was 13.0% in
the current quarter compared to 13.7% in the first quarter of 2003.
The 0.7% decline in North American operating income as a percentage of
total sales is the result of:
- the 0.5% decline in gross margin explained above; and
- a 0.2% increase in S,G&A expenses as a percentage of total sales from
6.1% in the comparative quarter to 6.3% in the current quarter
primarily as a result of increased costs with the Company's systems
integration operations and costs as a result of the FM Lighting
Acquisition.
Europe
European operating losses were $10.7 million in the current quarter
compared to $2.8 million in the first quarter of 2003.
European operating income continues to be negatively impacted by
efficiency and other performance issues at the Company's Prometall facility.
This is a metal trim facility located in Germany which, amongst other
processes, anodizes parts. As a result of a significant increase in business
volumes, primarily new Audi business, Prometall's operations were transferred
to a new and larger facility in 2003. Prometall continues to incur significant
costs to polish and rework anodized parts and continues to outsource a
significant volume of anodized production due to a current over capacity
condition in anodizing due to anodizing yields being below standard. Although
the Company is making some progress in addressing the current operating issues
at this facility, progress is slow and a significant improvement in
Prometall's operating losses is not expected in the near term. Operating
income at Prometall declined by $4.1 million in the first quarter of 2004 over
the comparable prior year period.
In addition, the Company launched its new Belplas paint line in the
fourth quarter of 2003 to service a portion of the production volume on the
VW Group A5 (Golf) program. With the initial start up of the paint line, first
run yields are currently well below standard. However, performance is
gradually improving. In addition, this paint line has significant open
capacity. The Company's continental Europe paint capacity consolidation plan,
announced in the fourth quarter of 2003, is expected to significantly improve
the utilization of the Belplas paint line in 2005. Readers are asked to refer
to the "Continental Europe Paint Capacity Consolidation Plan" section of this
MD&A for further discussion. Operating losses at Belplas, and the related
Brussels Sequencing Centre, increased $5.2 million in the first quarter of
2004 over the comparable prior year period as a result of the issues
described above.
Operating results were also negatively impacted by:
- costs associated with various Porsche programs launching at a new
assembly and sequencing facility in Zuffenhausen, Germany with fascia
and related trim production currently at the Company's Decoform
facility and third parties (Decoform Porsche production will be
shifted to Belplas as the Company implements its continental Europe
paint capacity consolidation plan);
- costs associated with the Company's new Formatex moulding, assembly
and sequencing facility located in Poland which is currently
servicing the VW Group T5 (Transit Van), and preparing to launch the
SLW (City Car), Polish production programs;
- chrome line start up and launch costs; and
- costs associated with the DaimlerChrysler Mercedes A Class program
which will launch in the second half of 2004 including costs to ready
the Company's new Carmodul facility for launch.
The above costs were offset by:
- the ramp up of the Company's Modultec mould in colour, assembly and
sequencing facility which was launched in Germany in the fourth
quarter of 2002 to supply the VW Group T5 (Transit Van) program and
the Company's Graz, Austria assembly and sequencing facility which
was launched in the first quarter of 2003 to supply Magna Steyr's
DaimlerChrysler Mercedes E Class 4 Matic program (the aggregate net
change in operating income in the first quarter of 2004 compared to
2003 at Modultec and Graz, was an improvement of $1.4 million);
- improvements at the Company's other European facilities, most notably
within the paint operations at its Decorate trim facility in Germany;
- lower depreciation expense at Sybex as a result of the United Kingdom
impairment charge taken in the fourth quarter of 2003; and
- lower operating losses at Merplas which improved to $2.3 million from
$3.8 million for the first quarters of 2004 and 2003, respectively.
Adjusting to eliminate the impact of translation of British Pound
operating losses into U.S. dollars, Merplas' operating loss improved
$2.1 million. The improvement is the result of higher sales and the
impact of significant performance improvements implemented over the
last two years.
Interest Expense
Interest expense was substantially unchanged at $2.7 million. Interest
capitalized on the Company's Decostar and Belplas paint line projects was
$0.3 million and $0.2 million in the first quarters of 2004 and 2003,
respectively.
Reduced interest expense as a result of the repayment of debt due to
Magna with lower cost bank borrowings was offset by translation of Canadian
dollar and Euro interest into the Company's U.S. dollar reporting currency.
The original interest rate on the first and second tranches of Euro
denominated debt due to Magna was 7.0%. The first and second tranches were due
October 1, 2002 and October 1, 2003, respectively. However, since the original
maturity dates of this debt, the Company, with Magna's consent, had been
extending the repayment of this debt at 90 day intervals at market interest
rates ranging from 3.14% to 4.29%. This debt was repaid in December 2003 and
January 2004 through draws on the Company's bank credit facility.
Interest on debt due to Magna and its affiliates and included in reported
interest expense amounted to $2.2 million compared to $2.7 million for the
first quarters of 2004 and 2003, respectively. The third tranche of Euro
denominated debt due to Magna, totalling $87.1 million, continues to be due
December 31, 2004 and bears interest at its original rate of 7.5%. Canadian
dollar denominated debt due to Magna totalling Cdn$45.6 million is due
June 30, 2004 and bears interest at 3.07%.
Amortization of Discount on Convertible Series Preferred Shares
The Company's amortization of the discount on the portion of the
Convertible Series Preferred Shares held by Magna classified as debt decreased
to $1.2 million for the current quarter compared to $2.0 million for the first
quarter of 2003. Amortization in 2004 is limited to amortization on the Series
5 Convertible Series Preferred Shares as the Series 4 Convertible Series
Preferred Shares were fully amortized as of December 31, 2003.
Other Income
Other income in 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.
Income Taxes
The Company's effective income tax rate decreased to 37.2% from 38.0% for
the first quarters of 2004 and 2003, respectively. The Company's other income
in the first quarter of 2003 was not subject to tax. Excluding other income,
the Company's effective tax rate for the first quarter of 2003 was 39.2%.
The reduction in the Company's effective tax rate is the result of an
increase in income generated in lower tax rate jurisdictions and recent
business reorganizations which contributed to a reduction in the effective
rate, partially offset by an increase in statutory Ontario, Canada tax rates.
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. Cumulative unbenefited tax loss
carryforwards, primarily in the United Kingdom, Germany, Belgium and Poland,
total approximately $155 million. Substantially all of these losses have no
expiry date and will be available to shelter future taxable income in these
jurisdictions. The Company's effective tax rate in future periods could
increase if losses in the United Kingdom, Germany, Belgium and Poland grow.
Net Income
Net income was substantially unchanged at $27.2 million compared to
$27.1 million for the first quarters of 2004 and 2003, respectively.
Excluding other income, the Company's net income improved $1.5 million
which is primarily attributable to reduced Convertible Series Preferred Share
amortization and the lower effective tax rate.
Financing Charges
Financing charges on the Convertible Series Preferred Shares held by
Magna (comprised of dividends declared on the Convertible Series Preferred
Shares less the reduction of the Convertible Series Preferred Shares dividend
equity component) decreased to $0.5 million for the current quarter from
$1.4 million for the comparable prior year period. The decrease reflects the
conversion of the Series 1, 2 and 3 Convertible Series Preferred Shares into
the Company's Class A Subordinate Voting Shares in August 2003.
In March of 2003, the Company issued the Convertible Debentures.
Financing charges, net of income tax recoveries, related to the Convertible
Debentures were $1.0 million in the current quarter. Readers are asked to
refer to the Company's consolidated financial statements and MD&A for the year
ended December 31, 2003 for a discussion of the accounting for the Convertible
Debentures.
Diluted Earnings Per Share
Three Month Periods Ended
March 31,
----------------------------
%
2004 2003 Change
-------------------------------------------------------------------------
Earnings per Class A Subordinate Voting
or Class B Share (U.S. dollars)
Basic $ 0.31 $ 0.38 (18%)
Diluted 0.27 0.30 (10%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A Subordinate Voting
and Class B Shares outstanding (in millions)
Basic 83.5 68.1 23%
Diluted 106.3 98.4 8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The increase in the weighted average number of basic Class A Subordinate
Voting and Class B Shares outstanding is due to the issuance of 14,895,729
Class A Subordinate Voting Shares on conversion of the Series 1, 2 and 3
Convertible Series Preferred Shares during the third quarter of 2003. This
transaction negatively impacted basic earnings per share but had no impact on
diluted shares outstanding or diluted earnings per share.
Diluted earnings per share for the current quarter declined to $0.27.
Excluding other income, the Company's diluted earnings per share for the first
quarter of 2003 was $0.28. The $0.01 decline in diluted earnings per share
excluding other income is primarily attributable to an increase in the average
number of diluted Class A Subordinate Voting and Class B Shares outstanding
due to the issuance in March 2003 of the Convertible Debentures and to the
issuance of 548,600 Class A Subordinate Voting Shares to the Decoma employee
deferred profit sharing program during the second quarter of 2003.
The maximum number of shares that would be outstanding if all of the
Company's stock options, Convertible Series Preferred Shares and Convertible
Debentures issued and outstanding as at March 31, 2004 were exercised or
converted would be 109.1 million. Readers are asked to refer to note 7 of the
Company's unaudited interim consolidated financial statements for the three
month period ended March 31, 2004, included elsewhere herein, for further
discussion.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows for the Three Month Periods Ended March 31, 2004 and 2003
-------------------------------------------------------------------------
Three Month Periods Ended
March 31,
----------------------------
(U.S. dollars in millions) 2004 2003
-------------------------------------------------------------------------
EBITDA
North America $ 76.2 $ 68.1
Europe (3.4) 3.4
Corporate (2.1) (4.6)
-------------------------------------------------------------------------
70.7 66.9
Interest, cash taxes and other operating
cash flows (14.9) (19.8)
-------------------------------------------------------------------------
Cash flow from operations before changes in
non-cash working capital 55.8 47.1
Cash generated from (invested in) non-cash
working capital 9.5 (3.5)
Fixed and other asset spending, net
North America (15.1) (20.9)
Europe (17.7) (7.1)
Dividends
Convertible Series Preferred Shares (2.2) (3.1)
Class A Subordinate Voting and Class B Shares (5.8) (4.1)
-------------------------------------------------------------------------
Cash generated and available for debt reduction 24.5 8.4
Repayments of debt due to Magna (3.6) -
Net decrease in long-term debt (0.6) (0.3)
Net decrease in bank indebtedness (38.2) (19.7)
Issuance of Convertible Debentures - 66.1
Foreign exchange on cash and cash equivalents (0.5) 2.3
-------------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents $ (18.4) $ 56.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company has presented EBITDA as supplementary information concerning
the cash flows of the Company and its operating segments. The breakdown of
both EBITDA and fixed and other asset spending by segment provides readers
with an indication of where cash is being generated and used. The Company
defines EBITDA (totalling $70.7 million and $66.9 million in the first
quarters of 2004 and 2003, respectively) as operating income ($46.6 million in
both the first quarters of 2004 and 2003) plus depreciation and amortization
($24.1 million and $20.3 million in 2004 and 2003, respectively) 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 Generated and Available for Debt Reduction
Cash generated from operations and non-cash working capital exceeded
capital spending and dividends by $24.5 million for the first quarter of 2004
compared to $8.4 million for the first quarter of 2003.
The improvement is due primarily to higher EBITDA and to $9.5 million
generated from non-cash working capital in the current quarter. The reduction
in working capital is due primarily to an increase in days in accounts payable
from 46 at the end of the first quarter of 2003 to 51 at the end of the
current quarter.
Increased capital spending and dividends partially offset the favourable
impact of cash generated from working capital.
Investing Activities
Capital spending on a global basis totalled $32.8 million in the first
quarter of 2004.
Given economic uncertainties throughout 2001 and 2002, the Company
eliminated or delayed planned capital spending wherever possible. Due to prior
deferrals of previously planned facility upgrade and other process related and
improvement projects, capital spending increased in 2003 and will remain high
in 2004. In addition, capital spending in 2003 included spending to complete
the Belgium paint line, Decostar spending and significant European spending
related to new facility and program launches. Spending for 2004 is expected to
approximate $151 million. 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.
Current period capital spending includes continued Decostar spending,
Formatex spending as this facility prepares for the VW Group SLW (City Car)
launch and spending related to the DaimlerChrysler Mercedes A Class program
including spending to ready the Company's new Carmodul facility for the launch
of this program in the second half of 2004.
Dividends
Dividends paid on the Company's Convertible Series Preferred Shares were
$2.2 million for the current quarter down from $3.1 million in the comparative
prior year period due to the conversion of the Series 1, 2 and 3 Convertible
Series Preferred Shares into Class A Subordinate Voting Shares in August of
2003, partially offset by the translation of Canadian dollar dividends into
the Company's U.S. dollar reporting currency.
Dividends paid in the first quarters of 2004 and 2003 on Class A
Subordinate Voting and Class B Shares were US$0.07 and US$0.06 per share in
respect of the three month periods ended December 31, 2003 and 2002,
respectively.
Total dividends paid increased to $5.8 million in the current quarter
from $4.1 million in the comparable prior year period due to the increase in
the dividend rate and the number of shares outstanding primarily as a result
of the Series 1, 2 and 3 Convertible Series Preferred Share conversion.
Subsequent to March 31, 2004, the board of directors of the Company
declared a dividend of US$0.07 per Class A Subordinate Voting and Class B
Share in respect of the three month period ended March 31, 2004.
Financing Activities
The $24.5 million excess of cash generated from operations and non-cash
working capital over capital spending and dividends was used to repay debt due
to Magna of $3.6 million and to reduce bank indebtedness.
Bank indebtedness declined to $135.4 million at March 31, 2004 compared
to $177.3 million at December 31, 2003. Cash and cash equivalents at March 31,
2004 were $75.2 million compared to $93.5 million at December 31, 2003.
The Company's bank indebtedness is currently drawn substantially in
Canada. However, the Company held cash primarily in jurisdictions other than
Canada at the quarter end. Although there are no long-term restrictions on the
flow of funds from one jurisdiction to the other, there may be costs, such as
withholding taxes, to move funds between jurisdictions. As a result, the
Company is not always able to immediately apply the cash held in certain
jurisdictions against bank borrowings in other jurisdictions.
Consolidated Capitalization
-------------------------------------------------------------------------
March 31, December 31,
(U.S. dollars in millions) 2004 2003
-------------------------------------------------------------------------
Cash and cash equivalents $ (75.2) $ (93.5)
Bank indebtedness 135.4 177.3
-------------------------------------------------------------------------
60.2 83.8
Debt due within twelve months
Due to Magna, repaid in
January 2004 - 3.5
Due to Magna June 30, 2004
(previously due March 31, 2004) 45.6 46.5
Due to Magna December 31, 2004 87.1 90.6
Other 5.4 6.0
-------------------------------------------------------------------------
138.1 146.6
Long-term debt 10.5 11.2
-------------------------------------------------------------------------
Net Conventional Debt $ 208.8 21.2% $ 241.6 24.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liability portion of Series 4 and 5
Convertible Series Preferred
Shares, held by Magna
Current $ 148.9 $ 150.6
-------------------------------------------------------------------------
$ 148.9 15.1% $ 150.6 15.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shareholders' equity
Convertible Debentures $ 67.7 6.9% $ 66.1 6.6%
Other 558.7 56.8% 546.3 54.4%
-------------------------------------------------------------------------
$ 626.4 63.7% $ 612.4 61.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Capitalization $ 984.1 100.0% $1,004.6 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Convertible Debentures and the Series 4 and 5 Convertible Series
Preferred Shares are 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 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$12.48 on April 20, 2004, and have traded between
Cdn$10.35 and Cdn$14.95 over the 52 week period ended April 20, 2004. As a
result, it is possible that all, or a portion, of the Convertible Debentures
and the Series 4 and 5 Convertible Series Preferred Shares will be settled
with Class A Subordinate Voting Shares if the holders exercise their fixed
price conversion options. The possible conversions of the Company's
Convertible Debentures and Series 4 and 5 Convertible Series Preferred Shares
into Class A Subordinate Voting Shares is reflected in the Company's reported
diluted earnings per share.
Readers are asked to refer to the company's MD&A for the year ended
December 31, 2003 for further discussion on the terms of the Convertible
Series Preferred Shares and Convertible Debentures.
The Company's Net Conventional Debt to Total Capitalization at March 31,
2004 was 21.2% compared to 24.0% at December 31, 2003. This measure treats the
Company's hybrid Convertible Debenture and Convertible Series Preferred Share
instruments like equity rather than debt given their possible conversion into
Class A Subordinate Voting Shares.
The Company's Net Conventional Debt plus the liability portions of the
Convertible Series Preferred Shares to Total Capitalization, has improved to
36.3% at March 31, 2004 compared to 39.0% at December 31, 2003. This measure
treats the liability portions of the Convertible Series Preferred Shares like
debt rather than equity given their possible retraction for cash. The Series 4
Convertible Series Preferred Shares are retractable for cash at Magna's option
at any time and the Series 5 Convertible Series Preferred Shares are
retractable commencing December 31, 2004.
The Company's Net Conventional Debt plus the liability portions of the
Convertible Series Preferred Shares plus the Convertible Debentures to Total
Capitalization was 43.2% at March 31, 2004 compared to 45.6% at December 31,
2003. In addition to the liability portions of the Convertible Series
Preferred Shares, this measure treats the Convertible Debentures like debt
rather than equity given the possibility of settling them for cash on maturity
or redemption rather than for Class A Subordinate Voting Shares.
The Canadian Institute of Chartered Accountants (the "CICA") recently
amended Handbook Section 3860, "Financial Instruments - Disclosure and
Presentation", to require certain obligations that may be settled with an
entity's own equity instruments to be reflected as a liability. The amendments
must be adopted in the Company's 2005 consolidated financial statements with
retroactive application. Upon adoption, the Convertible Debentures currently
presented entirely within equity on the consolidated balance sheet will have
to be presented in part as a liability and in part as equity and the related
liability carrying costs will be presented as a charge to net income.
Unused and Available Financing Resources
At March 31, 2004 the Company had cash on hand of $75.2 million and
$164.6 million of unused and available credit representing the unused and
available portion of the Company's $300 million extendible, revolving credit
facility. This credit facility expires on May 27, 2004 at which time Decoma
may request, subject to lender approval, further revolving 364 day extensions.
Debt, excluding bank indebtedness, that comes due in the next twelve
months totals $138.1 million including debt due to Magna of $45.6 million due
June 30, 2004 and $87.1 million due December 31, 2004.
Since the original maturity of the amount due June 30, 2004, 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 date for this debt, there can be no assurance
that Magna will do so.
The Company anticipates that working capital investments, capital
expenditures and currently scheduled repayments of debt will exceed cash
generated from operations in 2004. As a result, the Company is dependent on
its lenders to continue to revolve its existing $300 million credit facility.
The Company is currently in discussions with its bank syndicate to expand the
principal amount, extend the term and favourably amend the financial covenants
of its current credit facility. Although the Company expects to successfully
secure credit on these terms, there can be no assurance that it will be able
to do so. 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 or work with Magna to establish a new fixed long-term amortization
schedule related to this debt.
The Company, in conjunction with a number of Magna affiliated companies,
has sponsored a finance program for tooling suppliers to finance tooling under
construction for the Company. The sponsors have received notice from the
lender of its intention to not advance further amounts under this facility.
Once existing tooling programs currently funded under this facility are
concluded, the facility will be terminated. The Company has historically made
limited use of this facility. Accordingly, its termination will not have a
significant impact on the Company. As at March 31, 2004, $0.3 million had been
advanced to tooling suppliers under the Company's portion of this facility
which is included in accounts payable.
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, 2003, operating lease
commitments for facilities totalled $25.6 million for 2004 including
$13.1 million under lease arrangements with affiliates of Magna. For 2008,
total operating lease commitments for facilities are $19.2 million including
$11.9 million under lease arrangements with affiliates of Magna. In certain
situations, the Company has posted letters of credit to collateralize lease
obligations.
The Company also has third party operating lease commitments for
equipment. These leases are generally of shorter duration. As of December 31,
2003, operating lease commitments for equipment total $8.2 million for 2004.
For 2008, operating lease commitments for equipment totalled $3.3 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.
Ford Production Purchasing Global Terms and Conditions
Ford Motor Company ("Ford") recently updated its Production Purchasing
Global Terms and Conditions (the "Global Terms") effective for shipments from
Decoma International Corp. ("DIC") and its subsidiaries (collectively the
"Supplier") to Ford on or after January 1, 2004. DIC is a direct significant
subsidiary of Decoma International Inc. Under the Global Terms, Ford and its
"related companies" (collectively the "Ford Group" or the "Buyer") have the
right to set off against the Supplier's receivables from the Ford Group
amounts owing to the Ford Group by the Supplier's "related companies".
"Related companies" is defined under the Global Terms to include any parent
company of the Buyer or the Supplier, as appropriate, and any subsidiary or
affiliate in which any of them owns or controls at least 25% of the voting
stock, partnership interest or other ownership interest.
Where DIC acts as a "Supplier", Decoma interprets the Global Terms to
mean that "related companies" would include Decoma International Inc. (as the
parent company of DIC) and its direct and indirect subsidiaries and at least
25% owned entities (collectively the "Decoma Group") but would not include
Magna and its direct and indirect subsidiaries and at least 25% owned entities
other than the Decoma Group (collectively the "Magna Group").
Ford may assert that the term "related companies" includes, in relation
to DIC or other Suppliers in the Decoma Group, the Magna Group and attempt to
set off a Magna Group liability against a Decoma Group receivable. To date,
Ford has not attempted to take such action against Decoma and Decoma is not
aware of any existing material liability of the Magna Group to the Ford Group
which could be applied by the Ford Group in such a manner. If the Ford Group
took such an action against Decoma in respect of a material liability of the
Magna Group, such action could have a material adverse impact on Decoma's
financial condition and liquidity. Any such action by Ford would be contested
by Decoma at such time.
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 Convertible Debentures and the equity portion
of Convertible Series Preferred Shares. After tax return on common equity was
19% for three month period ended March 31, 2004 compared to 15% for the year
ended December 31, 2003. The conversion of the Series 1, 2 and 3 Convertible
Series Preferred Shares into Class A Subordinate Voting Shares during 2003 and
translation, particularly of European net assets into the Company's U.S.
dollar reporting currency, has negatively impacted after tax return on common
equity. 2003 was also negatively impacted by the United Kingdom impairment and
continental Europe paint capacity consolidation charges.
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
(U.S. dollars March 31, December 31, March 31, December 31,
in millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
North America 34% 34% $ 684.1 $ 721.0
Europe (14%) (17%) 318.9 312.7
Corporate n/a n/a 31.9 21.0
-------------------------------------------------------------------------
Global 18% 17% $ 1,034.9 $ 1,054.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Return on funds employed was 18% in the first quarter of 2004 compared to
17% for 2003. Return on funds employed for 2003 was negatively impacted by the
United Kingdom impairment and continental Europe paint capacity consolidation
charges and higher non-cash working capital investments. Increased investments
in Europe, particularly with the new Belplas paint line, and in North America
at Decostar and translation, particularly of European funds employed into the
Company's U.S. dollar reporting currency, continue to negatively impact return
on funds employed.
CONTINENTAL EUROPE PAINT CAPACITY CONSOLIDATION PLAN
During the fourth quarter of 2003 the Company completed, and committed
to, a plan to consolidate its continental Europe paint capacity. This plan
entails mothballing the Company's Decoform paint line in Germany and
transferring Decoform's painted trim and fascia business to the Company's
newer paint lines at its Decorate and Belplas facilities in Germany and
Belgium, respectively. Decoform will continue to mold and assemble products
for the Company's Decorate facility.
The consolidation will result in severance costs associated with a
reduction of the Decoform workforce of 284 employees which were accrued in the
fourth quarter of 2003.
Decoform employees have a contractual notice period of up to two quarters
following the quarter in which individual notice is given. The consolidation
plan envisions substantially all employees working through their contractual
notice periods with paint line production transfers completed by the end of
2004.
A continuity of the severance accrual related to this consolidation plan
is as follows:
(U.S. dollars, in thousands)
-------------------------------------------------------------------------
Balance, December 31, 2003 $ 6,799
Payments (50)
Currency translation (258)
-------------------------------------------------------------------------
Balance, March 31, 2004 $ 6,491
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ACCOUNTING POLICY CHANGES
Stock-based Compensation
As provided for by new accounting recommendations of the CICA, the fair
value of stock options granted, modified or settled on or after January 1,
2003 is recognized on a straight-line basis over the applicable stock option
vesting period as compensation expense in selling, general and administrative
expenses in the consolidated statements of income. The impact of this
accounting policy change on reported net income and earnings per share was not
significant. Readers are asked to refer to note 5 to the Company's unaudited
interim consolidated financial statements included elsewhere herein for
further discussion.
Asset Retirement Obligations
As provided for by new accounting recommendations of the CICA, the
Company is required to estimate and accrue for the present value of its
obligations to restore leased premises at the end of the lease. At lease
inception, the present value of this obligation is recognized as other
long-term liabilities with a corresponding amount recognized in fixed assets.
The fixed asset amount is amortized, and the liability amount is accreted,
over the period from lease inception to the time the Company expects to vacate
the premises resulting in both depreciation and additional rent in cost of
sales in the consolidated statements of income.
These requirements were adopted by the Company on January 1, 2004 with
retroactive restatement. The impact of this accounting policy change on
reported net income and earnings per share was not significant. However, this
policy change did result in an increase in other long-term liabilities of
$3.3 million, an increase in fixed assets of $1.7 million and reductions in
future tax liabilities of $0.3 million, the current translation adjustment of
$0.2 million and retained earnings of $1.1 million at March 31, 2004. Readers
are asked to refer to note 5 to the Company's unaudited interim consolidated
financial statements included elsewhere herein for further discussion.
Separately Priced Tooling Contracts
The Company adopted CICA Emerging Issues Committee Abstract No. 142,
"Revenue Arrangements with Multiple Deliverables" (EIC-142), prospectively for
new revenue arrangements with multiple deliverables entered into by the
Company on or after January 1, 2004. The Company enters into such multiple
element arrangements where it has separately priced tooling contracts that are
entered into at the same time as contracts for subsequent parts production.
EIC-142 addresses how a vendor determines whether an arrangement involving
multiple deliverables contains more than one unit of accounting and also
addresses how consideration should be measured and allocated to the separate
units of accounting in the arrangement. Separately priced tooling can be
accounted for as a separate revenue element only in circumstances where the
tooling has value to the customer on a standalone basis and there is objective
and reliable evidence of the fair value of the subsequent parts production.
The adoption of EIC-142 did not have a material effect on the Company's
revenue or earnings for the three month period ended March 31, 2004.
While the application of EIC-142 must be based on the facts and
circumstances of new revenue arrangements, the Company anticipates that
substantially all of its multiple element arrangements involving the sale of
both tooling and subsequent parts production will result in tooling being
accounted for on a gross basis as a separate revenue element, which accounting
treatment is consistent with the Company's historic revenue recognition
practices.
OTHER SELECTED FINANCIAL INFORMATION
The Company is required to disclose material changes in its contractual
obligations from the amounts disclosed as of December 31, 2003 in the
Company's MD&A for the year ended December 31, 2003. There have been no
material changes in the Company's contractual obligations during the first
quarter of 2004 that are outside the ordinary course of business.
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
specifically include, without limitation; the Company's reliance on its major
OEM customers; increased pricing concession and cost absorption pressures from
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; the Company's
continued compliance with credit facility covenant requirements; 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; 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
ability to successfully implement European improvement plans; the cost and
timing of completion of the continental Europe paint capacity consolidation
plan; the possible conversion of the Company's Convertible Debentures and
Convertible Series Preferred Shares to Class A Subordinate Voting Shares; the
Company's ability to raise necessary future financing; capital spending
estimates; and the recoverability of the Company's remaining goodwill and
other long lived assets, are all subject to significant risk and uncertainty.
Readers are also referred to the discussion of "Other Factors" set out in the
Company's Annual Information Form dated May 20, 2003, wherein certain of the
above risk factors are discussed in further detail. 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.
>>
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
