Tesma International Inc. Q3
Tesma Third Quarter Report
Three and nine months ended September 30, 2004
Dear Shareholders:
Please find attached our results for our third quarter and
nine-month period ended September 30, 2004.
Financial Highlights
[Sales chart]
- Sales for the third quarter rose 27% to $324 million
compared to $254 million for the third quarter of 2003, and
for the first nine months, increased 28% to $1,025 million.
- The acquisition of Davis Industries, Inc. (Davis) which we
completed in our first quarter, added approximately $33
million in new sales for us this quarter and $101 million on a
year-to-date basis.
- North American vehicle production volumes for the quarter
were down 1% however, key programs at our largest customer
were down significantly from a year ago. In Europe,
production volumes were up 2% in the quarter.
[Net Income Chart]
- Content per vehicle increased 30% in North America and 6%
in Europe to $56 and (euro) 19, respectively, during the quarter.
On a year to date basis, content per vehicle increased in
North America and Europe by 31% and 4% (to $55 and (euro) 17,
respectively). Davis' operations contributed approximately $7
of content in North America in both the third quarter and
first nine months of the year.
- Net income in the third quarter decreased 23% to $12
million compared to $16 million in the prior year, and for the
first nine months, increased 18% to over $63 million.
- Diluted earnings per share for the quarter decreased to
$0.38 from $0.49 in 2003, while year-to-date, increased to
$1.93 from $1.64.
- Operating cash flow in the third quarter increased to $34
million, an increase of 13% over the $30 million generated in
the prior year. For the first nine months of the year,
operating cash flow increased to $126 million from $99 million
in the same period of 2003.
- Our net cash position decreased during the quarter by 5% to
$138 million, from $144 million at the end of the second
quarter but increased from $123 million at December 31, 2003.
[N.A. Content Per
Vehicle Chart] Despite our growth in sales during the quarter, our
profitability levels decreased largely due to the escalation
in steel prices which dramatically increased our manufacturing
costs. These higher costs, combined with continued production
declines at our largest customers and operating issues at a
recently-acquired facility more than offset the additional
gross margins we were able to generate on our higher sales.
Additional financial and operating highlights are outlined in
the attached Management's Discussion and Analysis of Results
of Operations and Financial Position for the three and nine-
month periods ended September 30, 2004.
[Diluted EPS chart]
Effective November 22, 2004, our Class A Subordinate Voting
Shares will be traded on the TSX under the stock symbol
"TSM.SV.A". This change is due to a new symbol naming
convention implemented by the TSX. The stock symbol for our
Class A Subordinate Voting Shares on NASDAQ (TSMA) is not
affected by this change.
/s/ Anthony E. Dobranowski /s/ Klaus Blickle
___________________________ ________________________
Anthony E. Dobranowski Dr. Klaus Blickle
Vice Chairman & Chief Financial President
Officer
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL POSITION
FOR THE THIRD QUARTER AND NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004
November 1, 2004
Tesma International Inc. ("Tesma") designs, engineers, tests and
manufactures technologically-advanced powertrain (engine and transmission)
and fuel components, modules and systems for the global automotive industry.
We employ approximately 5,700 skilled and motivated people in 28
manufacturing facilities in North and South America, Europe and Asia, and
five focused tooling, design and R&D centres supporting our three principal
product technology groups: Tesma Engine Technologies, Tesma Transmission
Technologies and Tesma Fuel Technologies.
The following management's discussion and analysis of our consolidated
operating results and financial position (MD&A) is for the three and nine-
month periods ended September 30, 2004 and 2003 and should be read in
conjunction with the accompanying unaudited interim consolidated financial
statements and notes thereto and with the audited consolidated financial
statements and notes for the year ended December 31, 2003 and management's
discussion and analysis in our 2003 Annual Report. All amounts in this MD&A
are in United States dollars (U.S. dollars) unless otherwise indicated.
PRIVATIZATION PROPOSAL
As previously announced on October 25, 2004, our Board of Directors
received a proposal from Magna International Inc. (Magna) to acquire all the
outstanding Tesma Class A Subordinate Voting Shares not owned by Magna. If
approved, the transaction would privatize Tesma back as a wholly-owned
operating group of Magna.
OVERVIEW
Profitability levels in our third quarter decreased largely as a result
of a continued escalation in steel prices which are dramatically increasing
our manufacturing costs and affecting all suppliers. While the higher prices
are directly affecting our material costs at facilities not on steel buying
programs, the impacts have become even more far reaching during the third
quarter as the longevity of the high prices continues to ripple through more
areas of the economy. A significant portion of our steel which was contracted
under long-term supply agreements are now subject to significant surcharges
as smaller resellers cannot absorb price increases charged by the mills.
Additionally, smaller parts suppliers are having trouble securing steel and
absorbing higher costs which is causing both delay and quality issues which
can then lead to higher costs for freight, quality control and purchased
components as we strive to meet our customer requirements for quality and
delivery. We have approached certain customers regarding this industry issue
but have yet to see any meaningful assistance. Instead, we continue to
experience customer pressure for pricing concessions.
In the North American market, the trend of vehicle production declines
and deteriorating market share of our traditional North American customers
continued through the third quarter. This was especially true at General
Motors (GM), our largest customer, where production decreased further from a
weak period in the prior year, especially on a number of higher-volume North
American engine programs that have significant Tesma content. Overall volumes
in North America remain consistent with the prior year so the declines at the
traditional North American original equipment manufacturers (OEMs) translate
into market share gains and production increases at the New Domestic OEMs. In
Europe, our positive momentum through the early part of this year continued,
especially at our European die-casting operations which continue to benefit
from significant operating improvements and efficiencies achieved over the
past year. In addition, we launched the first water pump program from our new
Italian facility for Fiat's 1.3L engine. This program will be followed by
launches expected later this year for other Fiat engines.
Our results also reflect the acquisition of Davis Industries, Inc.
(Davis). These operations, consisting of three operating facilities, added
approximately $33 million of sales in the quarter ($101 million year-to-date)
and increased our North American content per vehicle by over $7 (over $7
year- to-date). Despite these increased sales, the Davis operations
negatively impacted our bottom line in the third quarter and nine months
year-to-date as these facilities are not party to any steel resale programs
with our OEM customers and continue to be hit the hardest by steel price
increases and surcharges. In fact, we estimate that the Davis facilities
represent approximately 40% of the increased cost burden associated with the
rising steel prices. In addition, significant operating issues and numerous
launches of "non-core" products at one division are leading to significantly
higher manufacturing costs. Additional details regarding the impact of the
Davis operations on our third quarter results are provided in the relevant
Sections of this MD&A below.
Our third quarter included some significant business awards, especially
from a strategic standpoint as they covered a number of geographic regions.
We have been awarded a number of programs for GM in China, including a front
cover with oil pump, thermostat housing, flexplate and cam covers for the
L850 engine to be produced in the Chinese market and an oil pump for the GF6
transmission to be installed in vehicles for the Chinese and Korean markets.
These awards exemplify our approach of establishing an "incubator plant" in
China to plan, develop and launch numerous programs from each of our primary
technology groups. Other awards during the quarter include an oil pump to be
supplied to GM for their global V8 engine program, oil pumps and drive plate
assemblies for the Hyundai Motor Corporation, additional business to supply
water pumps for Fiat for their 1.4L engine out of our Italian operations and
a water pump and thermostat housing to be supplied to Jaguar for their AJ41
V8 engine program.
Our financial resources remain strong. Cash levels, net of bank
indebtedness, exceed $137 million, and our total debt to total capitalization
decreased to a conservative 10%. With this strong foundation which we expect
to continue to build, we are well positioned to continue our growth and
ultimately deliver increased shareholder value.
OUTLOOK
For the full year ending December 31, 2004, we have reduced our estimate
of production volumes in North America to approximately 15.9 million units,
about equal with production in 2003. In Europe, we expect production of
approximately 16.2 million units, 1% lower than full year volumes experienced
last year. Based on these forecasts, the inclusion of the Davis operations,
our anticipated tooling and other automotive sales, our projected content per
vehicle levels and the impact of foreign exchange at the current rates in
effect, we continue to expect overall sales growth of approximately 25% for
the year ending December 31, 2004.
ACCOUNTING CHANGES
Stock-based compensation
In 2003, we adopted new rules issued by the Canadian Institute of
Chartered Accountants (CICA) under Handbook Section 3870 "Stock-Based
Compensation and other Stock-Based Payments" (CICA 3870) which require that
stock-based compensation transactions be accounted for at fair value. We
adopted these new rules earlier than required by the standard and applied
them on a retroactive basis to stock-based awards granted on or after August
1, 2002, the date that we were initially required to adopt CICA 3870. As a
result, the comparative nine-month period ended September 30, 2003 has been
restated and reflects a cumulative adjustment to increase the opening balance
of contributed surplus by $0.1 million and decrease the opening balance of
retained earnings by $0.1 million. In the current quarter ended September 30,
2004, we recorded compensation expense of $0.1 million ($0.7 million year-to-
date) as part of selling, general and administrative (S,G&A) expenses, while
a year ago, the expense recorded was $0.4 million in both the three and nine-
month periods ended September 30, 2003.
Asset Retirement Obligations
Effective January 1, 2004, the CICA issued Handbook Section 3110 "Asset
Retirement Obligations" (CICA 3110). CICA 3110 requires that we estimate and
recognize the fair value (discounted to present value) of any liabilities for
future asset retirements, where applicable, and record the associated cost
over the period of use. For us, this primarily represents the obligation, at
the end of each lease term, to restore leased premises back to their condition
at the inception of the lease. At lease inception, the present value of this
obligation is determined and recognized as a long-term liability with a
corresponding amount recognized as an additional capital asset. The amount
recognized as a capital asset is amortized and the liability amount is
accreted over the period from lease inception to the time we expect to vacate
the premises, such that both depreciation and interest expense are recorded
as charges against earnings. We adopted these rules effective January 1, 2004
and the resulting impact to the interim consolidated financial statements was
not significant.
Hedging Relationships
On January 1, 2004, amended guidance under the CICA Accounting Guideline
13 "Hedging Relationships" (AcG-13) became effective. AcG-13 establishes
certain conditions and documentation requirements that must exist at the
inception of a hedge in order to apply hedge accounting. On January 1, 2004,
our treasury management system complied with the documentation requirements
of AcG-13 and, as such, we continue to apply hedge accounting, when
applicable, in our consolidated financial statements.
DISCUSSION OF THE RESULTS
Foreign Currency Exchange Rates
As a majority of our operations have functional currencies other than the
U.S. dollar, our reported results can be significantly affected by movements
in the exchange rates of the Canadian dollar, euro, Swiss franc and Korean
won, all relative to the U.S. dollar. The magnitude of the impact of foreign
exchange on our results in the periods presented will primarily depend on,
and vary directly with, the size of the fluctuations, relative to the U.S.
dollar, of the underlying functional currencies in our Canadian, European and
South Korean-based operations. The acquisition of Davis, which is based in
the United States, reduces the relative impact of currency fluctuations on
our reported results, but only to a limited extent.
The average exchange rates for our most significant functional currencies
relative to the U.S. dollar during the current and comparative quarter were
as follows:
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Average rates Q3 Q3 % YTD YTD %
for the period 2004 2003 change 2004 2003 change
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Canadian dollar 0.7663 0.7245 +6% 0.7532 0.7012 +7%
-------------------------------------------------------------------------
Euro 1.2227 1.1244 +9% 1.2255 1.1121 +10%
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Korean won 0.000869 0.000851 +2% 0.000861 0.000837 +3%
-------------------------------------------------------------------------
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The exchange rates in effect at the end of the current quarter, our
previous quarter, at our December 31, 2003 year-end and at the quarter ended
a year ago were as follows:
-------------------------------------------------------------------------
Rates at the end Sep Jun Dec % change Sep % change
of the period 2004 2004 2003 Dec 2003 Sep
-------------------------------------------------------------------------
Canadian dollar 0.7918 0.7546 0.7752 +2% 0.7382 7%
-------------------------------------------------------------------------
Euro 1.2401 1.2310 1.2591 -2% 1.1483 +8%
-------------------------------------------------------------------------
Korean won 0.000870 0.000866 0.000836 +4% 0.000869 -
-------------------------------------------------------------------------
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Vehicle Production Volumes
North American vehicle production volumes for the third quarter
experienced a 1% decline from the prior year and were approximately
3.6 million units. For the first three quarters, North American vehicle
production volumes decreased only slightly and remained substantially
unchanged at 11.9 million units. Among the North American automakers however,
the situation varies significantly. The "Big Three" automakers all
experienced production declines over the prior year ranging from 2% to 6%
(compared to a weak period in the prior year where production declines ranged
from 5% to 16% over 2002 production levels) with GM, North America's largest
automaker and our largest customer, declining by 5%. Our sales to GM actually
declined at levels exceeding GM's vehicle production decline as we believe
engine production levels of their two highest Tesma content engines, the L850
and GEN IV, experienced declines approximating 17% and 7%, respectively, with
only some volume transferring to other engines that have Tesma content.
Contrary to the "Big Three", other North American OEMs (including the New
Domestic manufacturers), led by strong growth at Nissan and Toyota, continued
their trend of increasing production (and market share) with growth of 9% in
the quarter versus a year ago and 8% growth during the first nine months.
European vehicle production levels increased 2% in both the quarter and
nine-month period, to 3.7 million and 12.5 million units, respectively. Our
largest European customers, including the Volkswagen Group (VW),
DaimlerChrysler, and Fiat, all experienced strong growth ranging from 5% to
12%.
Sales
Our consolidated sales in the quarter increased 27% to $323.5 million
from $254.3 million in the same quarter last year. Sales for the nine-month
period totaled $1,025.3 million, an increase of 28% from $800.5 million for
the same period in 2003. Of this increase, approximately $16 million
($66 million year-to-date), or 23% (29% year-to-date) of the overall growth,
can be attributed to higher translated sales primarily due to the
strengthening of the Canadian dollar and euro relative to the U.S. dollar,
$33 million ($101 million year-to-date) is attributable to the acquisition of
Davis and the balance is largely attributable to organic growth. All of these
factors contributed to a 30% increase in our North American content per
vehicle in the quarter to $56 from $43 in the same period last year, and by
31%, to $55 for the first nine months compared to $42 in the first nine
months of 2003. Our European content increased 6% to (euro) 19 in the quarter
and for the first nine months, increased 4% to approximately (euro) 17.
North American Operations
Our North American operations consist of 18 manufacturing facilities (13
in Canada and 5 in the U.S.) employing 4,400 employees. These operations
reported sales of $259.2 million for the quarter, up 31% from $198.1 million
in the same quarter a year ago and for the nine-month period, increased 31%
to $819.1 million. Of this growth, $32.5 million, representing over $7 in
North American content ($100.8 million in sales and over $7 in content year-
to-date) was generated by Davis and approximately $11 million ($46 million
year-to- date), representing over $3 in North American content ($4 year-to-
date) was a result of the stronger Canadian dollar relative to the U.S.
dollar. The remaining increase in the quarter of approximately $17 million
($49 million year-to-date) represents true native currency organic growth of
approximately 9% (8% year-to-date) and was realized despite our reduced
ownership level in STT Technologies (STT) since February 2004 (see separate
discussion later in this MD&A). This "true" growth in sales and content per
vehicle was fueled by new program launches and volume increases, the most
notable of which are as follows:
- year-over-year volume increases on the integrated front cover for
GM's High Feature V6 engine (initially launched at low volumes in the
first quarter of 2003) which is primarily installed in various
Cadillac models;
- the launch of crankshaft seals for GM's 3.8L engine and oil pans for
their Line 4 engine;
- increased volumes of tensioner assemblies supplied to Ford on various
truck programs and to VW;
- increased year-over-year volumes of balance shaft assemblies for GM's
Line 4 and Line 5 engine programs reflecting the launch of GM's new
midsize pickups late in 2003;
- initial shipments of die-cast and machined transmission components
and assemblies to GM for various light vehicle transmissions which
was "takeover" business;
- increased volumes on the oil pump for Ford's 5R110 transmission that
is now mated with a gas engine in addition to the existing diesel
engine;
- new launches and volume increases in Tesma Fuel Technologies
including: filler pipe assemblies for DCX for their Durango, Sebring,
Stratus and Chrysler 300 vehicles, filler pipes for the Saturn VUE
and stainless steel fuel tank assemblies for DCX's JR platform; and,
- higher volumes of the rotating clutch for the Allison LCT
transmission.
Our continued success in capturing new business has allowed us to achieve
organic growth despite continuing declines in "Big Three" market share (more
specifically, lower production levels for the "high Tesma content" GM
engines) and continued pricing pressures from our major customers.
Although North American production volumes decreased slightly during the
quarter, the acquisition of Davis improved our relative level of business
with non-traditional customers and thus our sales and content growth were
somewhat insulated from the declines experienced at our largest customers.
Sales from our North American operations increased to 78% of our consolidated
sales for both the quarter and nine-month periods ended September 30, 2004
compared to 76% in both periods a year ago, as expected given that the
majority of Davis' customers are located in North America.
European Operations
Our 6 European operations, located in Germany, Austria, and Italy, employ
1,100 employees. During the quarter, sales from our European operations
increased by 19% to $65.4 million from $54.8 million a year ago with a
stronger euro accounting for approximately $5 million of this sales growth.
For the first nine months, sales increased to $206.2 million from $174.5
million, an increase of 18% of which over half was derived from the stronger
euro. The remaining increase in sales in the quarter of $5 million ($13
million increase year-to-date) was fueled by growth in our European content
per vehicle (as mentioned above) and exports, primarily as a result of the
following:
- the fuel filler pipe assembly for Ford's high volume, global C1
(Focus) platform (initially launched in the third quarter of 2003)
which includes volumes exported to Mazda in Japan;
- higher sales of service and aftermarket products;
- stronger sales of tensioners and brackets to European customers; and,
- initial shipments of water pumps (previously delayed) to Fiat from
one of our Italian entities.
These increases more than offset declines in stainless steel fuel tank
volumes from our Austrian subsidiary specifically, volumes of the P2X program
(Volvo) which decreased dramatically and volumes for the PQ34 (Beetle) tank
decreased as there is a hiatus in production until 2005.
Sales from our European operations represented 20% of our consolidated
sales in the quarter and nine-month period ended September 30, 2004, compared
to 21% in the comparable periods last year. This relative decline compared
with North America reflects the acquisition of the Davis facilities.
Other Automotive Sales
Our Other Automotive segment consists of two manufacturing facilities in
South Korea, one in China and a small assembly facility in Brazil, employing
approximately 200 people. Sales for the quarter were up 24% to $8.6 million
from $6.9 million a year ago, representing 2% of our consolidated sales (3%
in the prior year). The increase in the quarter is primarily the result of
increased exports to North America, including water pumps supplied to
DaimlerChrysler for their 5.7L engine (initially launched in the second half
of 2003) which is new, offered on additional vehicle applications including
the Dodge Magnum and water pumps supplied to GM for their Premium V8 engine.
In addition, the increase reflects higher volumes for the RXC transmission
oil pump, our first production contract with Hyundai Motor Company and
increased exports into Europe including the launch of water pumps and oil
pumps to Ford for their Lion V6 engine. For the first nine months, sales were
up 29% to $26.0 million from $20.1 million a year ago and represent 2% of our
consolidated sales (3% of consolidated sales in the same period a year ago).
Tooling and other sales for the third quarter (which are included in the
above segmented sales totals) increased by $5.1 million to $21.3 million
compared to $16.2 million in the same quarter a year ago. Foreign currency
translation accounted for only a small portion (approximately $0.5 million)
of the change and the Davis facilities contributed $4.4 million. For the
first nine months, tooling and other sales increased to $60.2 million
compared to $38.0 million year ago. The increased tooling sales during the
year occurred primarily in our North American operations with the Davis group
accounting for $9 million, currency translation adding approximately $3
million and tooling revenues associated with future launches for programs
such as GM's 3.9L engine, ZF's continuously variable transmissions and Ford's
6-speed transmission.
Our focus on satisfying the needs and demands of our customers is
translating into continued growth in all of our major markets. In North
America, the Davis acquisition, foreign exchange translation and the
continued launch of new product spurred growth in sales to our North American
customers by 30% to $219.4 million for the quarter from $169.0 million a year
ago (representing 68% of our consolidated sales for the quarter, up from 66%
in the quarter a year ago) and by 34% to $709.2 million for the first nine
months compared to $531.1 million in the same period last year (representing
69% of our consolidated sales for the first nine months, up from 66% last
year).
Sales to our European-based customers grew in the quarter by 19% to
$89.6 million compared to $75.3 million in the same period a year ago
(representing 28% and 30% of consolidated sales, respectively). This growth
was driven by the stronger euro relative to the U.S. dollar, higher exports
of tensioners, balance shaft assemblies and some Davis flexplates and
transmission shells to Europe, shipments of the Ford C1 filler pipe
assemblies (initially launched in June 2003), initial shipments of water
pumps from one of our Italian facilities, increased exports into Europe from
our Korean subsidiary and higher demand for service parts. For the first nine
months sales to European customers increased 15% to $274.5 million from
$238.5 million in the same period last year (representing 27% and 30% of our
consolidated sales, respectively).
For the quarter, sales to Australasian customers increased by 25% to
$9.3 million compared to $7.5 million a year ago (3% of consolidated sales
for both periods) due primarily to new launches for Hyundai in Korea,
increased exports of fuel products (particularly the Ford C1 program) from
our European operations into Japan and China, offset partially by lower sales
to Mazda in Japan as older programs balanced out. Year-to-date sales to these
customers increased $6.5 million to $27.7 million, (representing 3% of
consolidated sales in both periods). Sales to customers in the South American
market increased to $5.2 million from $2.5 million (2% of consolidated sales)
during the quarter, due primarily to higher exports from our Canadian and
European operations, and a slight increase from our Brazilian subsidiary.
Year-to-date, our sales to these customers increased $4.1 million to $13.9
million.
Sales to our four largest worldwide customers, GM, Ford, DaimlerChrysler
and VW, accounted for 69% of our consolidated sales during the quarter and
nine month period, respectively (73% and 75% for the respective periods in
the prior year). The improved diversification is, in a large part,
attributable to the addition of Davis, which improves our sales to non-
traditional "New Domestic" OEMs, in particular Nissan and Honda. Our sales to
the global operations of GM, our largest customer group, declined to 36% of
our consolidated sales in the three month period ended September 30, 2004 and
37% in the nine-month period, versus 42% in the same periods a year ago. This
trend is largely attributable to a different mix of customers in the three
Davis facilities and to the lower production levels at GM. While no single
product sold to any customer accounted for more than 10% of our consolidated
sales in the quarter this year or last year, modules and systems supplied for
the GM GEN III/IV and L850 engine programs accounted for approximately 14% of
our consolidated sales in the quarter (16% of our year-to-date consolidated
sales) compared to 16% in the same quarter last year (19% of our year-to-date
consolidated sales last year) with the decrease reflecting reduced production
volumes for these engine programs and the impact of Davis' customer mix.
Gross Margin
Gross margin percentage for the third quarter decreased to 18.2% from
20.9% in the comparable period a year ago, and on a year-to-year basis
decreased to 20.9% from 21.4%.
The most significant factor leading to the decrease in our gross margin
in the quarter was the significant increase in the price of steel during the
third quarter which was experienced by all suppliers and our inability to
pass these costs through to our customers. A large portion of our steel
purchase requirements are covered under steel supply agreements with certain
customers and suppliers. However our suppliers have now introduced
significant surcharges to our contracted steel prices and a portion of our
steel buy, especially relating to programs produced in the Davis facilities
acquired earlier this year, are not or are no longer covered by any steel
supply contract. As a result, a significant portion of our steel purchases
were exposed to market pricing which we estimate negatively impacted our
margins by approximately 2.5% during the quarter (an increase from the 1.2%
negative impact we estimated in our second quarter).
Other negative factors impacting our margins in the quarter were
continued pricing concessions for our major North American customers, the
impact of reduced capacity utilization in facilities supplying for GM's L850
and GEN III/IV engine programs, significant operating issues and excess costs
at one of the Davis facilities in the midst of numerous launches of "non-
core" fuel door programs for various customers, higher repair costs incurred
on planned maintenance conducted during summer shutdown periods and premium
freight costs incurred due to supply issues of raw materials and
subcomponents from several suppliers (who are also struggling with higher
steel prices) which required us to expedite shipments both in and out of our
facilities in order to meet customer production requirements.
Our gross margins were significantly affected by the above negative
factors; however, offsetting these negatives to a certain degree were
favourable impacts which included:
- a lower realized exchange rate versus a year ago on U.S. dollar-
denominated materials purchased by certain Canadian divisions which
positively impacted our year-over-year margins in the quarter (fueled
by the continued year-over-year strengthening of the Canadian dollar
versus the U.S. dollar); and
- significant improvements over the prior year at our European die-
casting facility and higher sales, improved capacity utilization and
other operating efficiencies achieved at other divisions.
For the first nine months of the year, the aforementioned increases in
steel prices have reduced our gross margins by an estimated 1.3%. The year-
to-date impact reflects the gradual rise of these costs which started in the
latter part of our first quarter, increased to higher degrees in the second
quarter and then further increased in our third quarter. Other factors
impacting our margin for the first nine months of the year include year-to-
date vehicle production declines at our largest North American customers and
the operating issues and resulting costs at the Davis facility referred to
above partially offset by, higher SR&ED investment tax credits recorded in
2004 (including approximately $2 million recognized in our second quarter for
2003 claims that were completed in accordance with recently-issued amendments
to the rules governing claimable expenses) and operating improvements at our
North American and European die-casting and machining operations.
Selling, General and Administrative Expenses
S,G&A expenses for the quarter, as a percentage of sales, decreased to
6.1% from 6.5% for the same period a year ago. Absolute costs for the quarter
and nine months year-to-date increased to $19.6 million and $64.6 million,
respectively (6.1% and 6.3% of sales, respectively), from $16.5 million (6.5%
of sales) and $49.1 million (6.1% of sales) in the same periods,
respectively, last year. The increase in the quarter was due to the inclusion
of the Davis operations which added $2.2 million ($6.8 million year-to-date),
higher translated amounts resulting from a stronger Canadian dollar and euro
which added approximately $1 million (over $4 million year-to-date) and
increased employee headcounts in our Technology Groups and at various
divisions in support of higher growth and sales activities. Partially
offsetting these increases in the quarter was a gain of $0.9 million recorded
on the sale of our investment in Magna Systemtechnik AG to a related company
under the control of Magna (see Note 7(b)(ii) of the unaudited interim
consolidated financial statements).
On a year-to-date basis, additional factors contributing to the increase
in S,G&A costs include the $1.2 million loss recorded on the sale of a
portion of our ownership interest in STT in the first quarter, higher
marketing and travel-related costs associated with managing our increasing
global presence, higher stock-based compensation expenses recorded in
accordance with new accounting rules adopted in 2003 and increased incentive
based compensation on higher year-to-date pretax levels.
S,G&A costs include specific charges from Magna Services Inc.
(ServiceCo), a wholly-owned subsidiary of Magna International Inc. (Magna),
which are negotiated annually and are based on the level of benefits and
services provided to us by ServiceCo and include, but are not limited to:
information technology (WAN infrastructure and support services), human
resource and employee relations services (including administration of the
Employee Equity Participation and Profit Sharing Plan), specialized legal,
environmental, finance and treasury support, management and technology
training, and an allocated share of the facility and overhead costs dedicated
to providing these services. In the quarter, S,G&A costs included $0.6
million ($1.3 million year-to-date) paid to ServiceCo for specific charges
compared to $0.4 million ($1.3 million year-to-date) in the same period a
year ago.
Depreciation and Amortization
Depreciation and amortization charges for the quarter were $15.5 million
compared to $12.6 million in the comparable period in the prior year and for
the first nine months of the year, were $45.0 million compared to
$36.6 million in the same period last year. The increased depreciation in the
quarter consists of $1.2 million of depreciation on assets in the Davis
operations ($3.7 million year-to-date), approximately $1 million (close to
$3 million year-to-date) of increases due to foreign currency translation on
a stronger Canadian dollar and euro, $0.4 million ($0.8 million year-to-date)
of accelerated depreciation recorded on assets dedicated to the production of
water pumps for the truck volume applications of the GM GEN IV engine program
which is now expected to "balance out" sooner than originally expected in
December 2005 (as discussed in our second quarter MD&A) and increases
associated with our continuing investment in capital assets for new program
launches.
Interest, net
Net interest expense for the quarter was $0.4 million compared to
$0.1 million of interest income for the same period last year. The increased
interest expense is due to the remaining indebtedness and long-term debt
assumed and the $2.4 million note payable issued on the Davis acquisition,
combined with interest income foregone on the $45.0 million of cash
consideration and transaction costs paid for Davis. Similarly, on a year-to-
date basis, interest expense was $1.2 million compared to interest income of
$0.2 million in the same period a year ago. We continued to lower our bank
indebtedness and long-term debt levels in the quarter with payments totaling
$23.4 million which is in addition to the $18.6 million of payments we made
in the second quarter. The reduced levels of indebtedness and long-term debt
will lead to lower interest charges in future quarters as the interest rates
we were paying on these facilities exceeded returns we could have otherwise
yielded by investing the cash in short-term investments. We continue to
invest the remainder of our cash balances ($168.6 million at September 30,
2004) in short-term interest-bearing investments which offsets a significant
portion of our interest expense.
Affiliation and Social Fees
Affiliation and social fees paid to Magna increased to $3.2 million in
the quarter from $2.8 million in the same period last year, and on a year-to-
date basis, increased to $10.6 million, from $9.0 million in 2003. These fees
are comprised of the following:
- Under our affiliation agreement with Magna in effect until December
31, 2009 (subject to annual renewals thereafter), we pay an
affiliation fee calculated as 1% of our consolidated net sales,
subject to certain exceptions for sales from acquired businesses
(which are exempt from the calculation of the affiliation fee in the
year of acquisition, 50% inclusion in the year after acquisition, and
full inclusion in all subsequent years). The affiliation fee is paid
to Magna in exchange for, among other things, a non-exclusive
worldwide license to use certain Magna trademarks, access to Magna
management resources, and the collaboration and sharing of best
practices in areas such as new management techniques, employee
benefits and programs, and marketing and technological initiatives.
Primarily resulting from our increased consolidated net sales
(excluding sales from Davis which are exempt from the calculation in
2004), we paid $2.9 million in affiliation fees in the quarter and
$9.2 million year-to-date compared to $2.5 million and $7.9 million
in the same periods, respectively, last year.
- Under our social fee agreement with Magna in effect until December
31, 2009 (subject to annual renewals thereafter), we pay Magna a
social fee of 1.5% of pre-tax profits as a contribution to social and
charitable programs coordinated by Magna on behalf of Magna and its
affiliated companies (including us). We paid $0.3 million in social
fees in the quarter and $1.4 million year-to-date compared to
$0.3 million and $1.2 million, respectively, in the same periods of
the prior year.
Income Before Income Taxes
Income before income taxes decreased 5% to $20.3 million for the quarter
from $21.5 million in the same period a year ago. The decrease in the quarter
reflects higher S,G&A costs, increased depreciation charges, higher interest
expense and an increase in affiliation and social fees which more than offset
the $5.8 million improvement in our gross margin. However, for the nine month
period our income before income taxes increased by 21% to $93.1 million from
$77.1 million.
North American Operations
At our North American operations, income before income taxes for the
quarter was down $6.2 million, or 29%, to $15.1 million. The reduction to our
overall gross margins caused by the unprecedented increase in steel prices
(estimated at 2.5% for the quarter and 1.3% for the first nine months as
discussed earlier) was substantially incurred within our North American
facilities. This is especially true for the newly-acquired Davis facilities
which are not party to any customer steel buying programs. We estimate Davis
accounts for approximately 40% of the increased cost burden we have absorbed
since the beginning of the year. Additional factors contributing to our
reduced profitability for this segment include increased price concessions
demanded from our customers, significant operating issues and cost increases
at one of the Davis facilities in the midst of numerous "non-core" program
launches and continued declines in production volumes at our largest North
American customers as the trend of market share gains in the "New Domestic"
manufacturers continues. Foreign currency translation due to a stronger
Canadian dollar offset some of the above impacts by contributing an increase
of approximately $1 million (over $5 million year-to-date). On a year-to-date
basis, income before income taxes at our North American operations increased
7% to $75.3 million from $70.5 million primarily on the strength of our first
quarter which was only moderately impacted by steel price increases.
European Operations
Results for our European operations improved significantly as income
before income taxes grew to $6.4 million for the quarter compared to
$2.0 million a year ago. The improved profitability in the quarter reflects
strong results posted by one of our German subsidiaries on higher year-over-
year sales and our Austrian subsidiary where improved results during the
quarter (see Note 7(b)(ii) of the unaudited interim consolidated financial
statements) were driven by volume increases on key programs (in particular
the stainless steel filler pipe for Ford's C1 (Focus) program) and a $0.9
million gain was recognized on the disposal of its investment in MST. In
addition, a large part of the year-over-year improvement was achieved by
Eralmetall where operating improvements and other positive changes led to a
Significant reduction in the operating losses incurred during the quarter.
These positive factors were partially offset by increased costs associated
with the start up of production at our Italian subsidiary which were higher
than anticipated due to delays in program launches. For the first nine months
of the year, modest operating profits compared to significant losses in the
prior year at Eralmetall and foreign currency translation increases from a
stronger euro of approximately $2 million (nominal increases for the quarter)
combined with the other factors discussed above contributed to the increase
in our income before income taxes in our European operations, by over 100% to
$21.2 million from $10.2 million in the same period last year.
Other Automotive Operations
Our Asian and South American operations (which include our engineering
and marketing offices in Brazil, Japan and South Korea) generated a loss
before income taxes of approximately $1.2 million in the third quarter,
compared to a $1.9 million loss a year ago. Year-to-date, the loss before
income taxes decreased to $3.4 million versus $3.6 million last year. The
reduced losses are a result of higher sales from new programs that have
somewhat offset the higher engineering, design and other upfront product
development and support costs that we continue to carry at our Korean
facilities (in preparation for a significant amount of new business that
launches over the next few years) and increased costs associated with the
development of the infrastructure for our operations in China.
Provision for Income Taxes
Our effective income tax rate for the quarter was 39.3% up significantly
from the 25.9% in the same period a year ago and, on a year-to-date basis,
was 32.1% compared to 30.7% for the same period last year. The rate in the
current quarter primarily reflects losses at our U.S. subsidiary which were
not tax benefited. In deciding whether it is appropriate to recognize future
tax assets based on future projected operating results, it is generally
accepted that the length of the forecast horizon should be limited to
relatively short periods, for example 2 to 3 years. Our decision not to
benefit these losses is due to the presence of negative operating trends
(consisting of operating issues at one of the Davis facilities and the
significant negative impact of steel price increases on all five of our U.S.
facilities that provides uncertainty as to our ability to generate sufficient
future taxable income during a reasonable forecast period. Offsetting these
unbenefitted losses was the gain of $0.9 million recorded in our Austrian
subsidiary on the disposal of its investment in MST which is not taxable. The
net effect of these items was to increase our effective income tax rate for
the quarter by approximately 6%. In the third quarter a year ago, our
effective tax rate was reduced by approximately 10% due to the recognition of
the tax benefits associated with income tax losses and other future tax
deductible amounts (previously unrecognized) at STT.
For the nine months, our effective rate reflects $4.0 million of future
tax benefits on available loss carryforward amounts recognized at our
Austrian facility (as detailed in our second quarter MD&A) which more than
offsets the higher rate for our third quarter (as discussed above), higher
rates at most of our Canadian operations due to the Ontario corporate tax
rate increase effective January 1, 2004, the $1.2 million loss recorded in
our first quarter on the sale of a 25% ownership interest in STT which was
not deductible for tax purposes and non-deductible stock-based compensation
expenses. The lower effective rate in the prior year is due primarily to the
aforementioned tax benefits recognized at STT.
Net Income
The combination of the $1.2 million decline in income before income taxes
and the 13.4% increase in our effective tax rate this quarter compared to the
same period a year ago caused, our net income attributable to Class A
Subordinate Voting Shares and Class B Shares for the quarter to decrease 23%
to $12.3 million from $15.9 million in the prior year. On a year-to-date
basis, our net income grew by 18% to $63.2 million from $53.5 million in the
corresponding period a year ago.
Earnings per Share
For the quarter, basic and diluted earnings per Class A Subordinate
Voting Share or Class B Share (EPS) both decreased 22% to $0.38 from $0.49 a
year ago. The higher effective tax in the third quarter this year (as a
result of losses not benefited net of a non-taxable gain on disposal of
investment discussed above) negatively impacted our earnings per share by
approximately $0.03 while the tax losses benefited in the prior year
favorably impacted our earnings per share last year by approximately $0.06.
For the first nine months of the year, basic and diluted EPS increased to
$1.95 and $1.93, respectively, from $1.65 and $1.64, respectively, last year.
The average number of basic and diluted shares outstanding in the quarter
increased to 32.5 million and 32.7 million, respectively, (from 32.3 million
and 32.6 million, respectively, a year ago) due to the exercise of stock
options over the past twelve months and a higher average trading price for
our Class A Subordinate Voting Shares which results in more options becoming
dilutive. Similarly for the nine months, the average number of basic and
diluted shares outstanding in the quarter increased to 32.4 million and
32.7 million, respectively, (from 32.3 million and 32.5 million,
respectively, a year ago).
FINANCIAL CONDITION, LIQUIDITY AND FINANCIAL RESOURCES
Our cash balances at September 30, 2004, net of bank indebtedness, were
$137.9 million compared to $144.3 million at June 30, 2004 and $122.5 million
at December 31, 2003. The $6.4 million decrease in net cash balances in the
quarter was due to continuing investments in capital and other assets,
reductions to indebtedness levels, dividend payments and repayments of long-
term debt offset by, cash generated by operating activities and increases
primarily resulting from the strengthening of the Canadian dollar (the
currency in which a majority of our net cash balances are held) since the end
of the previous quarter.
Operating Activities
Cash provided from operations in the quarter, before the effect of
changes in non-cash working capital, increased 13% to $34.3 million from
$30.4 million in the same period last year. The increase was driven by an
increase in non-cash items consisting mainly of increased depreciation
charges and future tax provisions which offset the $3.6 million reduction in
our net income. For the first nine months, our cash generated from operations
increased 27% to $126.1 million from $99.1 million due to the $9.8 million
increase in our net income combined with higher non-cash depreciation and
income tax charges.
Cash invested in non-cash working capital during the quarter totaled
$18.2 million compared to $6.8 million invested in non-cash working capital
in the same period last year. The increased investment in working capital in
the current quarter is due primarily to significant tax payments made during
the quarter in association with income at one of our jointly-controlled
entities and increased working capital invested in the Davis operations in
the nine months since our acquisition.
As a result, cash provided from operating activities in the quarter
decreased to $16.0 million from $23.6 million in the prior year and for the
nine-month period, cash generated by operations almost doubled to
$114.1 million, from $68.1 million a year ago.
Investing Activities
Cash spent on investing activities in the third quarter was $23.4 million
compared to $10.2 million in the same period last year and consists primarily
of spending on capital asset additions in both periods. The capital spending
consisted of machinery and equipment and certain facility expansions to
support new business and upcoming launches. Cash spent on investing
activities in the first nine months of this year totaled $78.6 million
compared to $16.7 million in the same period last year. This increase
reflects $34.2 million of additional capital spending on facility upgrades
and machinery and equipment for upcoming program launches (many of which are
expected to launch in 2005) including: front covers, water pumps and oil pan
assemblies for GM's 3.9L High Value V6 engine program; takeover production of
die-cast and machined components and assemblies for various GM transmissions;
stainless steel fuel tank assemblies for DaimlerChrysler in Europe; front
cover assemblies for Hyundai's Lambda V6 engine program; and stamped
transmission parts and assemblies for GM's X13-16R transmissions and Ford's
upcoming 6-speed transmission. In addition, our net spending in the prior
year reflects $25.0 million of proceeds from the sale of our corporate campus
property to MI Developments Inc. (MID) in January 2003 (see Note 7(a)(ii) of
the accompanying unaudited interim consolidated financial statements).
Capital assets purchased for our North American operations accounted for
70% and 72% of the total capital spending in the three and nine-month periods
ended September 30, 2004, respectively (compared to 76% and 61%,
respectively, for the same periods last year), and our European operations
accounted for 24% and 21% of our consolidated capital spending, respectively,
in these same periods (versus 16% and 19% of our total spending in the same
periods last year). Capital spending at our Asian and other operations
accounted for 6% of our total third quarter spending (7% year-to-date)
compared to 8% (20% year-to-date) in the same period last year.
Financing Activities
Cash used by financing activities totaled $27.9 million and $32.9 million
for the three and nine-month periods, respectively, compared to $2.6 million
and $11.5 million, respectively, in the same periods a year ago. The increase
in cash used during the current quarter reflects a $21.6 million reduction in
our bank indebtedness levels due to payments made against outstanding
indebtedness at our Korean subsidiary after we completed a recapitalization
of this subsidiary and lower levels of outstanding cheques in our Canadian
operations. On a year-to-date basis, additional payments were made in our
second quarter to pay down operating lines of credit at certain foreign
subsidiaries as part of the implementation of a recapitalization plan (as
fully described in our second quarter MD&A).
Repayments of long-term debt totaled $1.8 million in the quarter compared
to $1.2 million in the same period last year and for the first nine months,
totaled $10.6 million compared to $1.8 million in the same period a year ago.
The significant increase in our year-to-date debt repayments reflects early
repayment and cancellation of certain "higher interest rate" long-term debt
facilities assumed on the acquisition of Davis (as part of the
recapitalization plan implemented during the second quarter referred to
above).
Proceeds from the issuance of additional debt were $nil million and
$0.5 million during the quarter and the first nine months of the year,
respectively, compared to $3.3 million and $6.8 million, respectively, in the
same periods last year. In the third quarter last year, $3.3 million
($6.7 million year-to-date) was obtained under government sponsored "low
interest" loan programs by our Austrian subsidiary to fund capital equipment
for new program launches.
Our Corporate Constitution requires the payment of dividends of at least
20% of after-tax profits on a rolling three-year basis. During the quarter,
dividends totaling $4.5 million (Cdn $0.18 per share) were paid compared to
$3.8 million (Cdn $0.16 per share) in the same period a year ago. The
additional dividends paid in the current quarter reflects the increase in our
quarterly dividend rate from Cdn $0.16 per share to Cdn $0.18 per share as
approved by our Board of Directors in May 2004. For the nine months year-to-
date, we paid $12.8 million in dividends, a decrease from the $13.3 million
paid in the same period last year despite the increase in the quarterly
dividend rate. The dividends paid in the prior year were higher due to the
change in our fiscal year end to December 31 in 2002 which required us to pay
dividends on account of five months during the first quarter of 2003,
compared to dividends paid on account of the usual three months in our first
quarter of 2004.
As initially reported during the first quarter, the transaction in which
our ownership interest in STT was reduced from 75% to 50% (see more detailed
discussion later in this MD&A) also involved the sale of $7.7 million of our
shareholder loans to STT to our joint venture partner for $7.7 million in
cash, thereby bringing each shareholder's proportionate share of loans to an
equal basis.
During the quarter, no stock options were exercised, however during the
first six months of the year, 110,900 options to purchase Class A Subordinate
Voting Shares were exercised and shares were issued for total proceeds of
$1.0 million. In the quarter and nine months year-to-date of the prior year,
we received $0.2 million and $0.4 million, respectively, on the issuance of
Class A Subordinate Voting Shares on the exercise of incentive stock options.
Financing Resources
At September 30, 2004, we had cash and cash equivalents on hand (net of
bank indebtedness) of $137.9 million. In addition to our cash resources, we
had unused and available credit facilities (excluding those available for
foreign exchange purposes) of approximately $80.9 million. Of our total long-
term debt of $72.4 million (see Contractual Obligations section below),
approximately 88% is not due until May 2006 or later.
Our total debt to capitalization ratio at September 30, 2004 was 10%,
down from our previous quarter's 11% but unchanged from December 31, 2003. A
large portion of the long-term-debt assumed and note payable issued as part
of the consideration paid on the Davis acquisition in the first quarter was
subsequently paid down or reduced such that the ratio has returned to our
December 31, 2003 level.
Shareholders' Equity
Shareholders' equity increased to $606.9 million from $581.9 million at
the prior quarter and $549.3 million at December 31, 2003.
The increase in shareholders' equity in the quarter is due primarily to
net income generated in excess of amounts distributed to shareholders in the
form of dividends, and a $17.1 million increase in the currency translation
adjustment account. The currency translation adjustment account represents
the unrealized change in the value of our net investment in subsidiaries and
divisions operating in functional currencies different from our reporting
currency, the U.S. dollar. This includes all of our Canadian, European, Asian
and South American operating and/or reporting entities which collectively
account for the majority of our total equity. The increase in the currency
translation adjustment account in the quarter occurred primarily as a result
of a strengthening of the Canadian dollar and euro against the U.S. dollar
since June 30, 2004.
As mentioned earlier, 110,900 Class A Subordinate Voting Shares (none
during the third quarter) were issued upon the exercise of stock options
during the first nine months of the year for proceeds of $1.0 million.
Under new rules adopted for stock-based compensation (see Accounting
Changes), contributed surplus is now recorded as the offset when compensation
expense is recognized on stock options recorded at fair value. The increase
in the balance during the quarter and nine months year-to-date reflects
$0.1 million and $0.7 million of stock-based compensation expense recorded in
these periods, respectively, on all options granted on or after August 1,
2002 (the date at which the Company was first required to adopt CICA 3870).
As the underlying options recorded at fair value are subsequently exercised,
the accumulating balance in contributed surplus will be transferred
systematically to Class A Subordinate Voting Shares and considered additional
proceeds received on these option exercises.
The increase in our shareholders' equity has resulted in increases to our
book value per Class A Subordinate Voting Share or Class B Share on a diluted
basis by 4%, to $18.67 per share (Cdn $23.58), from $17.90 per share (Cdn
$23.72) at June 30, 2004 and $16.92 per share (Cdn $21.83) at December 31,
2003.
Outstanding Share Information
Our share structure remained consistent with that in place as at December
31, 2003. For details concerning the nature of our securities, refer to Note
12 "Capital Stock" of the notes to our audited consolidated financial
statements for the year ended December 31, 2003 contained in our 2003 Annual
Report.
As of September 30, 2004, the following of our securities and options to
purchase securities were issued and outstanding:
-------------------------------------------------------------------------
Class A Subordinate Voting Shares 18,251,329
Class B Shares 14,223,900
Stock options to purchase Class A Subordinate Voting Shares 1,481,450
-------------------------------------------------------------------------
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FOREIGN CURRENCY ACTIVITIES
We operate globally, which gives rise to a risk that our earnings, cash
flows and shareholders' equity may be adversely affected by fluctuations in
relative foreign exchange rates. More specifically, we have operations in
Canada, the United States, Germany, Austria, Italy, Switzerland, South Korea,
Brazil and China, with each division or subsidiary operating in the
functional currency of the country or region in which it is located. As a
result, we have seven principal functional currencies in which we currently
conduct business (in the order of relative current prominence): the Canadian
dollar, the euro, the U.S. dollar, the Korean won, the Swiss franc, the
Brazilian real and the Chinese renmibis.
Where possible, we negotiate sales contracts and purchase materials,
equipment and labour in the functional currency of the country or region in
which a particular operation is located, however, in some instances, we may
negotiate and agree to transact in a different currency at the request of
certain customers and/or suppliers. When we are able to transact in the
functional currency of the country or region of operation, the foreign
currency cash flows for the payment of labour and purchase of materials and
capital equipment denominated in foreign currencies can be naturally hedged
when contracts to deliver certain products are also denominated in these same
foreign currencies. When we are not able to have these "natural hedges", we
manage the remaining exposure through our foreign currency cash flow hedging
program in which we utilize foreign exchange forward contracts to manage
foreign exchange risk from our underlying customer contracts. In particular,
foreign exchange forward contracts are used for the sole purpose of hedging a
significant portion of our projected foreign currency inflows and outflows,
consisting primarily of U.S. dollar, euro and Korean won denominated
contractual commitments of our Canadian-based operations (to deliver products
to customers, or buy products from suppliers, in addition to the other
anticipated transactions expected to be settled in foreign currencies). We do
not enter into foreign exchange contracts for speculative purposes.
We have established formal documentation of the relationships between the
specific hedging instruments entered into under the hedging program and the
underlying cash inflows and outflows expected to result from specific firm
commitments or forecasted transactions. The amount and timing of forward
contracts are dependent upon a number of factors, including anticipated
production delivery schedules, anticipated customer payment dates and
anticipated product costs which may be paid in foreign currencies. We
formally assess and monitor, both at the inception of the hedge instrument
and on an ongoing basis, whether the derivatives used for hedging purposes
are effective in offsetting changes in the fair values or cash flows of the
hedged items. As long as the derivative remains effective, gains and losses
on the derivative contracts are accounted for as a component of the related
hedged transaction. If the derivative contracts are determined at any point
in time to be ineffective as hedges, previously unrecognized gains or losses
pertaining to the portion of the hedging transactions in excess of the
projected foreign denominated cash flows would be recognized in income at the
time this condition was identified.
During the quarter ended September 30, 2004, we entered into numerous
foreign exchange forward contracts and as a result, our outstanding portfolio
of foreign exchange contracts differs significantly from the contracts
outstanding at December 31, 2003 as contained in Note 14(a) of our audited
consolidated financial statements for the year ended December 31, 2003
contained in our 2003 Annual Report. Details regarding the amount and timing
of our contracts outstanding at September 30, 2004 are provided below in the
Contractual Obligations and Off-Balance Sheet Financing section of this MD&A.
ACQUISITION OF DAVIS INDUSTRIES, INC.
As reported in the first quarter, we completed the acquisition of Davis
on January 2, 2004. The total consideration for the acquisition of all the
outstanding shares of Davis amounted to approximately $47.5 million which is
$1.0 million lower than the total consideration reported at the previous
quarter as a reduction to the purchase price was made (with a corresponding
reduction to goodwill) pursuant to claims made against certain
representations contained in provisions of the purchase agreement. The total
consideration consists of $44.6 million paid in cash which was held in escrow
at our December 2003 year end, $0.5 million in transaction costs and a $2.4
million note bearing interest at the rate of prime plus 1% per annum (reduced
by $1.0 million as discussed above). Refer to Note 2 of the accompanying
unaudited interim consolidated financial statements for the initial effect of
this acquisition on our consolidated balance sheet. We also assumed
$21.6 million of long-term debt (including current portion) and indebtedness
and $5.4 million of other long-term obligations.
REDUCTION OF OWNERSHIP INTEREST IN JOINTLY-CONTROLLED ENTITY
As previously reported, effective February 7, 2004, our partner in STT,
one of our jointly-controlled entities, exercised its option and repurchased
an additional 25% equity ownership from us for nominal cash consideration. As
a result of this transaction, we recorded a net loss of $1.2 million
(representing the excess of our carrying value for this 25% equity interest
over the consideration received) as part of S,G&A expenses in the first
quarter. This transaction negatively affected our first quarter and year-to-
date diluted earnings per share by approximately $0.04.
As a consequence of this transaction, our ownership in STT was reduced to
50% and, commencing February 8, 2004, we have proportionately consolidated
the assets, liabilities, revenues, expenses and cash flows of STT at our
reduced ownership percentage. In addition, as part of the transaction, $7.7
million of shareholder loans owed to us by STT were sold by us to our partner
for $7.7 million in cash, thereby matching each shareholder's proportion of
total loans to their equity interest.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our results of operations and financial
position is based upon the consolidated financial statements, which have been
prepared in accordance with Canadian generally accepted accounting principles
(GAAP). Note 22 of our audited consolidated financial statements for the year
ended December 31, 2003 contained in our 2003 Annual Report sets out the
material differences between Canadian and United States GAAP. The preparation
of the consolidated financial statements requires management to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of contingent
assets and liabilities. We make estimates based on historical experience and
various other assumptions that we believe are reasonable in the
circumstances, the results of which form the basis for our judgments about
the carrying value of assets and liabilities. On a continuous basis, we
evaluate our estimates. However, actual results may differ from these
estimates under different assumptions or conditions.
Refer to our annual MD&A contained in our 2003 Annual Report for a full
description of our critical accounting policies that affect the more
significant judgments and estimates used in the preparation of our
consolidated financial statements.
CONTINGENCIES
From time to time, we may be contingently liable for litigation and other
claims. Refer to note 21 of our audited consolidated financial statements for
the year ended December 31, 2003 contained in our 2003 Annual Report.
RELATED PARTY TRANSACTIONS
We have completed transactions with Magna, our controlling shareholder,
and other related parties as disclosed in Note 7 of the accompanying
unaudited interim consolidated financial statements.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET FINANCING
At September 30, 2004, we had contractual obligations for which we have
recognized liabilities on our consolidated balance sheet that require annual
payments as follows:
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(U.S. dollars in Less than 1-3 4-5 After
thousands) 1 year years years 5 years Total
-------------------------------------------------------------------------
Long-term debt and capital
lease obligations $ 4,849 $ 58,764 $ 7,468 $ 1,270 $ 72,351
Long-term license
arrangement 79 158 158 158 553
Purchase obligations(i) - - - - -
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Total contractual
obligations $ 4,928 $ 58,922 $ 7,626 $ 1,428 $ 72,904
-------------------------------------------------------------------------
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(i) We had no unconditional purchase obligations other than those related
to inventory, services, tooling, royalty arrangements based on future
sales and fixed assets in the ordinary course of business.
In addition to the above, our obligations with respect to employee future
benefit plans as at September 30, 2004, are as follows:
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(U.S. dollars in thousands)
-------------------------------------------------------------------------
Post-retirement medical benefits obligations $ 7,158
Termination and long service arrangements 5,945
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$ 13,103
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We also have off-balance sheet financing or other contractual
arrangements which include: operating lease contracts, foreign exchange
forward contracts, a contract to purchase hydroelectricity supply and certain
government assistance arrangements with contingent repayment terms. At
September 30, 2004, these commitments or arrangements require annual payments
as follows:
-------------------------------------------------------------------------
(U.S. dollars in Less than After
thousands) 1 year 1-3 years 4-5 years 5 years Total
-------------------------------------------------------------------------
Operating leases with
MI Developments Inc.
(MID)(i) $ 6,785 $ 7,545 $ 4,677 $ 20,802 $ 39,809
Operating leases with
third parties(i) 7,878 5,922 3,267 3,824 20,891
Electricity swap
contracts(ii) 1,078 - - - 1,078
Foreign exchange
instruments(iii)
Government assistance
arrangements(iv)
-------------------------------------------------------------------------
Total off-balance sheet
arrangements $ 15,741 $ 13,467 $ 7,944 $ 24,626 $ 61,778
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) A number of our facilities are subject to operating leases with
MID or with third parties. Upon adoption of CICA 3110, we have
estimated the present value of obligations to restore leased
premises at the end of the respective lease terms back to their
condition at the inception of the lease. At September 30, 2004, we
have accrued an asset retirement obligation of $1.9 million
(including interest accreted to the end of the period). In
addition, we have third party operating lease commitments for
various manufacturing and office related equipment. These leases
are generally of shorter duration.
(ii) As set out in Note 21(b) of our audited consolidated financial
statements for the year ended December 31, 2003 contained in our
2003 Annual Report, in May 2002, we entered into a three-year
contract (expiring May 2005) to purchase specified levels of
hydroelectricity supply during expected peak and non-peak time
periods at specified fixed prices. Liabilities for
hydroelectricity supply are recorded as the underlying power is
supplied to, and used by, our Canadian divisions that are covered
under the supply agreement. At September 30, 2004, the remaining
commitment under this supply agreement was approximately
$1.1 million.
(iii) As discussed earlier in this MD&A, we utilize foreign-exchange
forward contracts for the sole purpose of hedging a portion of the
projected foreign currency inflows and outflows that are expected
to occur throughout the expected duration of underlying production
programs. In accordance with Canadian GAAP, presuming the
underlying hedge contracts are effective in offsetting actual
foreign currency outflows to the extent intended, we utilize rates
in the forward contracts that are maturing during any period (to
the extent that the transactions are hedged) to determine the
appropriate rates at which foreign currency transactions in the
period are recorded. In these instances, no adjustment is recorded
through income at each balance sheet date to record the mark-to-
market fair value amount that would be required to unwind the
contracts outstanding at that date.
During the third quarter, we entered into numerous foreign
exchange forward contracts. The outstanding forward contracts as
at September 30, 2004 which mature over the next five years as
follows:
For Canadian dollars
-------------------------------------------------------------
Buy (Sell) Buy (Sell)
U.S. dollars Weighted Euros Weighted
amount average rate amount average rate
-------------------------------------------------------------------------
(Amounts in
millions,
except rates)
2004 U.S. $ (5.9) 1.58 (euro) (11.7) 1.62
2004 13.4 1.48 1.7 1.38
2005 (15.5) 1.59 (43.2) 1.62
2005 53.0 1.33 5.4 1.40
2006 (13.8) 1.60 (39.2) 1.65
2006 30.0 1.32 2.4 1.42
2007 (8.4) 1.60 (32.8) 1.66
2007 30.3 1.29 - -
2008 - - (29.2) 1.67
2008 14.5 1.30 - -
2009 - - (10.0) 1.70
-------------------------------------------------------------------------
U.S. $ 97.6 (euro) (156.6)
-------------------------------------------------------------------------
(iv) We periodically receive funding under various government
assistance and other incentive programs in the various
jurisdictions in which we operate. In some specific instances,
some of the funding amounts that we have received may become
repayable if certain requirements are not maintained or, in
certain circumstances, if the underlying R&D projects reach
commercial success and begin to generate revenues. At September
30, 2004, we have approximately $0.6 million of funding that we
have received that may be subject to such conditions or
requirements. At September 30, 2004, no conditions currently exist
that would require any repayments of these amounts we have
received to date as funding.
SELECTED ANNUAL AND QUARTERLY FINANCIAL INFORMATION
We are required to disclose the following selected annual information for
the three most recently-completed fiscal years:
Five-month
Year ended period ended Year ended
(U.S. dollars in millions, December 31 December 31 July 31
except per share figures) 2003 2002 2002
-------------------------------------------------------------------------
Income Statement Data
Sales $ 1,098.6 $ 399.4 $ 855.2
Net income $ 74.1 $ 20.6 $ 53.6
Earnings per Class A Subordinate
Voting Share or Class B Share
Basic $ 2.29 $ 0.64 $ 1.82
Diluted $ 2.28 $ 0.63 $ 1.80
Cash dividends paid per Class A
Subordinate Voting Share or
Class B Share $ 0.75 $ 0.16 $ 0.64
-------------------------------------------------------------------------
Financial Position Data
Working capital $ 261.4 $ 180.5 $ 160.3
Total assets $ 839.0 $ 656.8 $ 604.8
Net cash:
Cash and cash equivalents $ 163.3 $ 135.1 $ 111.3
Bank indebtedness $ 40.9 $ 46.1 $ 18.9
Long-term debt (including
current portion) $ 66.8 $ 49.4 $ 50.1
-------------------------------------------------------------------------
Net cash $ 55.7 $ 39.6 $ 42.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In December 2002, we changed our year end to December 31 and as such, the
comparative period at December 31, 2002 is for the five-month period then
ended. Net income and earnings per share in this five-month period ended
December 31, 2002 were negatively affected by an $8.5 million impairment loss
($0.26 per share on a diluted basis) recorded on the long-lived asset group
at our German die-casting operations in December 2002. In the year ended
December 31, 2003, our profitability levels improved versus the prior periods
in our North American and European Automotive segments driven by strong
sales, content growth associated with new launches and a significant
strengthening of the Canadian dollar and euro versus the U.S. dollar.
Profitability levels in our Other Automotive segment in 2003 decreased due to
higher engineering, design and other upfront product development and support
costs for a significant amount of business to be launched in the future.
We are also required to disclose the following selected quarterly
information for the eight most recently-completed quarters:
(U.S. dollars in For the three-month period ended
millions, except ------------------------------------------------
per share and September June 30 March 31 December 31
share figures) 30 2004 2004 2004 2003
-------------------------------------------------------------------------
Sales $ 323,526 $ 340,382 $ 361,415 $ 298,055
Net income(i) $ 12,343 $ 26,214 $ 24,664 $ 20,659
Earnings per Class A
Subordinate Voting
Share or Class B Share
Basic (i) $ 0.38 $ 0.81 $ 0.76 $ 0.64
Diluted (i) $ 0.38 $ 0.80 $ 0.76 $ 0.64
Average number of shares
outstanding on a diluted
basis (in millions) 32.7 32.7 32.7 32.6
-------------------------------------------------------------------------
(U.S. dollars in For the three-month period ended
millions, except ------------------------------------------------
per share and September June 30 March 31 December 31
share figures) 30 2003 2003 2003 2002
-------------------------------------------------------------------------
Sales $ 254,317 $ 278,846 $ 267,373 $ 247,842
Net income (i) $ 15,908 $ 21,247 $ 16,298 $ 9,730
Earnings per Class A
Subordinate Voting
Share or Class B Share
Basic (i) $ 0.49 $ 0.66 $ 0.50 $ 0.30
Diluted (i) $ 0.49 $ 0.66 $ 0.50 $ 0.30
Average number of shares
outstanding on a diluted
basis (in millions) 32.6 32.5 32.5 32.5
-------------------------------------------------------------------------
(i) All 2003 figures presented have been restated to reflect the
retroactive adoption of new rules for stock-based compensation
(see Note 1 of the accompanying unaudited interim consolidated
financial statements).
Year-over-year sales for each of the comparable quarters presented above
reflect significant growth caused by foreign currency translation due to the
strengthening of the Canadian dollar and euro relative to the U.S. dollar.
The majority of the remaining growth in sales and earnings over the prior
year was driven by increased content per vehicle levels achieved in our major
markets despite vehicle production volume declines at our largest North
American customers. In the most recent quarter ended September 30, 2004, the
Company was negatively impacted by steel price increases and surcharges which
lowered profitability on a year-over-year basis. Net income and earnings per
share in the three-month period ended December 31, 2002 were negatively
affected by an $8.5 million impairment loss ($0.26 per share on a diluted
basis) recorded on the long-lived asset group at our German die-casting
operations in December 2002.
RISKS AND UNCERTAINTIES (FORWARD-LOOKING STATEMENTS)
This MD&A contains statements which, to the extent that they are not
recitations of historical fact, may constitute "forward-looking statements"
within the meaning of applicable securities legislation, including the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
May include financial and other projections, as well as statements regarding
Our future plans, objectives or performance, or our underlying assumptions.
The words "estimate", "anticipate", "believe", "expect", "intend" and other
similar expressions are intended to identify forward-looking statements.
Persons reading this MD&A are cautioned that such statements are only
predictions, and that our actual future results or performance may be
materially different.
Forward-looking information involves certain risks, assumptions,
uncertainties and other factors which may cause actual future results or
anticipated events to differ materially from those expressed or implied in
any forward-looking statements. In our case, these factors principally relate
to the risks associated with the automotive industry and include, but are not
limited to: our operating and/or financial performance, including the effect
of new accounting standards (such as the ongoing requirement for impairment
testing of long-lived assets) on our financial results; our ability to
identify, negotiate, complete and integrate acquisitions; the ability to
finance our business requirements, including raising required funding as
necessary; global economic conditions and changes in the various economies in
which we operate; our relationship with Magna International Inc.;
fluctuations in interest rates; changes in consumer and business confidence
levels; consumers' personal debt levels; vehicle prices; the extent and
nature of purchasing or leasing incentive campaigns offered by automotive
manufacturers; environmental emission and safety regulations; fuel prices and
availability; the continuation and extent of outsourcing by automotive
manufacturers; the extent, continued use, availability and pricing of steel
as a primary material for automotive parts versus alternative materials (such
as aluminum and plastics); our ability to continue to meet customer
specifications relating to product performance, cost, quality and service;
industry cyclicality or seasonality; trade and/or labour issues or
disruptions; customer pricing pressures, pricing concessions and cost
absorptions; warranty, recall and product liability costs and risks; actual
levels of program production volumes by our customers compared to original
expectations, including program cancellations or delays and changes in
product mix; new program launch risks; our dependence on certain engine and
transmission programs and the market success and consumer acceptance of the
vehicles into which such powertrain products are installed; our relationship
with and dependence on certain customers; currency exposure; technological
developments by our competitors; governmental, environmental and regulatory
policies and our ability to anticipate or respond to changes therein;
disruptions of terrorism or war; and other changes in the competitive
environment in which we operate.
For a more detailed discussion of some of these factors, reference is
made to the disclosures regarding risks and uncertainties set forth in our
Annual Information Form, Form 40-F and other public filings. We do not
intend, nor do we undertake any obligation, to update or revise any forward-
looking statements to reflect subsequent information, events, results,
circumstances or otherwise.
TESMA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)
(unaudited)
September 30 December 31
As at NOTE 2004 2003
-------------------------------------------------------------------------
ASSETS
Current:
Cash and cash equivalents $ 168,581 $ 163,255
Accounts receivable 7 217,080 193,160
Inventories 122,213 100,216
Prepaid expenses and other 16,830 10,152
Future tax assets 1,938 979
Income taxes recoverable - 2,372
-------------------------------------------------------------------------
526,642 470,134
Capital assets 2,3 365,135 303,749
Goodwill 2,3 54,235 15,096
Other assets 2 7,779 3,527
Future tax assets 2,5 8,116 1,834
Escrow deposit 2 - 44,635
-------------------------------------------------------------------------
$ 961,907 $ 838,975
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current:
Bank indebtedness 2 $ 30,678 $ 40,756
Accounts payable 7 117,505 80,398
Other accrued liabilities 7 46,973 34,126
Accrued salaries and wages 4 30,474 27,065
Income taxes payable 2,197 -
Future taxes payable 19,226 16,796
Long-term debt due within one year 2,3 4,849 3,919
-------------------------------------------------------------------------
251,902 203,060
Long-term debt 2,3 67,502 62,879
Future tax liabilities 21,274 18,102
Other long term liabilities 2,4 14,354 5,680
SHAREHOLDERS' EQUITY
Class A Subordinate Voting Shares,
authorized: unlimited
(issued: 18,251,329;
December 31, 2003 - 18,140,429) 4 199,271 198,250
Class B Shares, authorized: unlimited
(issued: 14,223,900;
December 31, 2003 - 14,223,900) 4 1,894 1,894
Contributed surplus 1,4 1,243 572
Retained earnings 1 336,179 285,736
Currency translation adjustment 68,288 62,802
-------------------------------------------------------------------------
606,875 549,254
-------------------------------------------------------------------------
$ 961,907 $ 838,975
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
TESMA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(U.S. dollars in thousands, except share and per share figures)
(unaudited)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
NOTE 2004 2003 2004 2003
-------------------------------------------------------------------------
(restated- (restated-
see Note 1) see Note 1)
Sales 7 $ 323,526 $ 254,317 $1,025,323 $ 800,536
-------------------------------------------------------------------------
Cost of goods sold 7 264,489 201,074 810,764 628,913
Selling, general and
administrative
expenses 3,7,8 19,597 16,536 64,563 49,102
Depreciation and
amortization 15,512 12,565 45,047 36,630
Affiliation and
social fees 7 3,223 2,818 10,635 9,026
Interest, net 7 358 (140) 1,203 (216)
-------------------------------------------------------------------------
Income before
income taxes 20,347 21,464 93,111 77,081
Income taxes 5 8,004 5,555 29,891 23,627
-------------------------------------------------------------------------
Net income for the
period attributable
to Class A
Subordinate Voting
Shares and Class B
Shares 12,343 15,909 63,220 53,454
Retained earnings,
beginning of period 328,385 256,909 285,736 225,678
Dividends on Class A
Subordinate Voting
Shares and Class B
Shares (4,549) (3,791) (12,777) (10,026)
Cumulative adjustment
for change in
accounting policy 1 - - - (79)
-------------------------------------------------------------------------
Retained earnings,
end of period $ 336,179 $ 269,027 $ 336,179 $ 269,027
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per Class A
Subordinate Voting
Share or Class B Share
Basic $ 0.38 $ 0.49 $ 1.95 $ 1.65
Diluted $ 0.38 $ 0.49 $ 1.93 $ 1.64
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of
Class A Subordinate
Voting Shares and
Class B Shares
outstanding during the
period (in millions)
Basic 32.5 32.3 32.4 32.3
Diluted 32.7 32.6 32.7 32.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
TESMA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(U.S. dollars in thousands)
(unaudited)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
NOTE 2004 2003 2004 2003
-------------------------------------------------------------------------
(restated- (restated-
see Note 1) see Note 1)
CASH PROVIDED FROM
(USED FOR):
OPERATING ACTIVITIES
Net income $ 12,343 $ 15,909 $ 63,220 $ 53,454
Items not involving
current cash flows 21,918 14,529 62,852 45,639
-------------------------------------------------------------------------
34,261 30,438 126,072 99,093
Net change in non-
cash working capital (18,249) (6,801) (11,972) (31,015)
-------------------------------------------------------------------------
16,012 23,637 114,100 68,078
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital asset additions (23,721) (10,680) (78,020) (43,856)
Decrease in other
assets 83 47 167 148
Proceeds from disposal
of capital and other
assets 7 209 384 630 27,006
Proceeds on disposal
of interest in
jointly-controlled
entity, net of cash
disposed 3 - - (953) -
Acquisition of
subsidiaries, in
excess of funds
previously held
in escrow 2 - - (427) -
-------------------------------------------------------------------------
(23,429) (10,249) (78,603) (16,702)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Decrease in bank
indebtedness (21,601) (1,122) (18,886) (3,480)
Dividends paid on
Class A Subordinate
Voting Shares and
Class B Shares (4,549) (3,791) (12,777) (13,326)
Repayments of long-
term debt (1,789) (1,180) (10,575) (1,814)
Proceeds from loan
repayments 3 - - 7,728 -
Issuance of Class A
Subordinate Voting
Shares - 190 1,021 353
Proceeds from issuance
of long-term debt - 3,291 540 6,768
-------------------------------------------------------------------------
(27,939) (2,612) (32,949) (11,499)
-------------------------------------------------------------------------
Effect of exchange
rate changes on cash
and cash equivalents 7,057 (162) 2,778 21,721
-------------------------------------------------------------------------
Net increase (decrease)
in cash and cash
equivalents during
the period (28,299) 10,614 5,326 61,598
Cash and cash
equivalents,
beginning of period 196,880 186,064 163,255 135,080
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 168,581 $ 196,678 $ 168,581 $ 196,678
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Accounting Changes
The unaudited interim consolidated financial statements have been
prepared following the accounting policies as set out in the
Company's 2003 Annual Report, except for the adoption of new
accounting pronouncements which include the Canadian Institute of
Chartered Accountants (CICA) Handbook Section 3110 "Asset Retirement
Obligations" (CICA 3110) and Accounting Guideline AcG-13 "Hedging
Relationships" (AcG-13).
CICA 3110 requires the Company to estimate and recognize the fair
value (discounted to present value) of any liabilities for future
asset retirements, where applicable, and to record the associated
cost over the period of use. For the Company, this primarily
represents the obligation, at the end of each lease term, to restore
leased premises back to their condition at the inception of the
lease. At lease inception, the present value of this obligation is
determined and recognized as a long-term liability with a
corresponding amount recognized as an additional capital asset. The
amount recognized as a capital asset is amortized and the liability
amount is accreted over the period from lease inception to the time
the Company expects to vacate the premises, such that both
depreciation and interest expense are recorded as charges against
earnings. The Company adopted these rules effective January 1, 2004
and the resulting impact to the unaudited interim consolidated
financial statements was not significant.
AcG-13 establishes certain conditions and documentation requirements
that must exist at the inception of a hedge in order to apply hedge
accounting. On January 1, 2004, the Company's treasury management
system complied with the documentation requirements of AcG-13 and, as
such, the Company continues to apply hedge accounting, when
applicable, in its consolidated financial statements.
As described in Note 1(p) of the Company's 2003 Annual Report, the
Company adopted the new rules under Handbook Section 3870 "Stock-
Based Compensation and other Stock-Based Payments" (CICA 3870) which
require that all stock-based compensation transactions be accounted
for at fair value. The Company adopted the rules on a retroactive
basis for all stock-based awards granted on or after August 1, 2002,
the date the Company was initially required to adopt CICA 3870. As a
result, the comparative nine-month period ended September 30, 2003
has been restated and reflects a cumulative adjustment to decrease
opening retained earnings and increase contributed surplus by
$0.1 million, respectively and to record compensation expense of
$0.4 million in the period ($0.4 million for the quarter ended
September 30, 2003).
The unaudited interim consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting
principles, 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, as contained in the
Company's 2003 Annual Report.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring adjustments necessary to present fairly the
financial position of the Company at September 30, 2004 and the
results of operations and cash flows for the three and nine-month
periods ended September 30, 2004 and 2003.
2. Business Acquisition
Acquisition of Davis Industries, Inc.
On January 2, 2004, the Company completed the acquisition of Davis
Industries, Inc. (Davis). Davis, at the time of acquisition, employed
over 700 employees at 3 manufacturing facilities located in Indiana
(2 facilities) and Tennessee and a corporate office and research and
development centre in Michigan. The main product focus for Davis is
stamped powertrain components and assemblies, including driveplate
assemblies, transmission shells, oil pan assemblies and engine valve
covers, but also includes some body and chassis stampings and fuel
filler door assemblies.
The Company has accounted for this transaction using the purchase
method of accounting and has recorded 100% of the assets,
liabilities, revenues, expenses and cash flows of Davis in its
consolidated results commencing January 3, 2004. Total consideration
for the acquisition of all the outstanding shares of Davis amounted
to $47.5 million, consisting of $45.1 million paid in cash (including
transaction costs of $0.5 million and $44.6 million that was held in
escrow at our December 31, 2003 year end) and the issuance of a five-
year, $2.4 million note bearing interest at the rate of prime plus 1%
per annum. The Company also assumed $21.6 million of long-term debt
(including current portion) and indebtedness and $5.4 million of
other long-term obligations. The following is a summary of the effect
of this acquisition on the Company's consolidated balance sheet:
---------------------------------------------------------------------
(U.S. dollars in millions)
Non-cash working capital $ 4.1
Capital assets 25.1
Intangible assets 5.6
Goodwill 40.5
Long-term debt (including current portion) and indebtedness (21.6)
Long-term employee benefit obligation (5.4)
Net future tax liabilities (0.8)
---------------------------------------------------------------------
Total consideration $ 47.5
---------------------------------------------------------------------
---------------------------------------------------------------------
Comprised of:
Cash paid from escrow account $ 44.6
Transaction costs 0.5
Five-year note bearing interest at prime plus
1% per annum 2.4
---------------------------------------------------------------------
$ 47.5
---------------------------------------------------------------------
---------------------------------------------------------------------
The goodwill recorded on the acquisition is deductible for income tax
purposes and included in the above allocation is an estimated future
tax asset of approximately $1.1 million resulting from an excess of
the tax basis of goodwill over the amount recorded for accounting
purposes.
The related allocations for this acquisition at the end of the
current period reflect a $1 million reduction to the purchase price
during the quarter (with a corresponding reduction to goodwill)
pursuant to claims made in accordance with certain provisions of the
purchase agreement. In addition, the allocations reflect adjustments
as a result of obtaining more information regarding asset valuations,
liabilities assumed and revisions of preliminary estimates of fair
values made at the date of purchase.
These amounts and the results of Davis are included in the North
American Automotive segment of the Company's operations (Note 6).
3. Reduction In Ownership Interest of Jointly-Controlled Entity
Pursuant to the agreement that resulted in the increase of the
Company's interest in one of its jointly-controlled entities from 45%
to 75% in December 2001, the other remaining shareholder retained an
option to purchase an additional 25% equity ownership from the
Company at any time prior to August 1, 2004 at a formula price.
Effective February 7, 2004, this shareholder exercised its option and
acquired an additional 25% interest in the jointly- controlled entity
for nominal cash consideration.
The impact of this transaction on the Company's consolidated balance
sheet was to decrease capital and other assets by $5.5 million, cash
and cash equivalents by $1.0 million, future tax and other current
assets by $4.3 million, goodwill by $0.2 million and total
liabilities and long-term debt by $9.8 million.
As a result of this transaction, the Company recorded a net loss
totaling $1.2 million (representing the excess of our carrying value
of this 25% equity interest over the consideration received) as part
of selling, general and administrative expenses in the Company's
first quarter.
In addition, as part of this transaction, $7.7 million of shareholder
loans due to the Company from the jointly-controlled entity were sold
by the Company to the other shareholder for $7.7 million in cash,
thereby bringing each shareholder's proportionate share of loans to
an equal basis.
This transaction and the results of this jointly-controlled entity
are included in the North American Automotive segment of the
Company's operations (Note 6). Effective February 8, 2004, only 50%
of the assets, liabilities, revenues, expenses and cash flows of this
jointly-controlled entity are included in the Company's consolidated
results.
4. Capital Stock
(a) Class A Subordinate Voting Shares and Class B Shares
The Company's share structure has remained consistent with that in
place as at December 31, 2003. For details concerning the nature of
the Company's securities, please refer to Note 12 "Capital Stock" of
the notes to the Company's audited consolidated financial statements
for the year ended December 31, 2003 contained in the Company's 2003
Annual Report.
Outstanding Class A Subordinate Voting Shares and Class B Shares
included in shareholders' equity of the Company consists of:
Class A Subordinate
Voting Shares Class B Shares
---------------------------------------------------------------------
(U.S. dollars in
thousands, except Number of Stated Number of Stated
shares) Shares Value Shares Value
---------------------------------------------------------------------
Balance, December 31,
2003 18,140,429 $ 198,250 14,223,900 $ 1,894
Exercise of incentive
stock options 110,900 1,021 - -
---------------------------------------------------------------------
Balance, September 30,
2004 18,251,329 $ 199,271 14,223,900 $ 1,894
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) Incentive Stock Options
Information concerning the Company's Incentive Stock Option Plan is
included in Note 12 "Capital Stock" of the notes to the Company's
audited consolidated financial statements for the year ended December
31, 2003 contained in the Company's 2003 Annual Report.
The following is a continuity schedule of the options outstanding:
Weighted
average
Number of Range of exercise
Options exercise price price
---------------------------------------------------------------------
(Share prices in Canadian dollars)
Balance, December 31, 2003 1,483,350 $10.50 - $31.74 $24.83
Granted 109,000 $31.55 $31.55
Exercised (110,900) $10.50 - $26.00 $12.35
---------------------------------------------------------------------
Balance, September 30, 2004 1,481,450 $10.50 - $31.74 $26.26
---------------------------------------------------------------------
---------------------------------------------------------------------
Exercisable at September 30,
2004 1,120,450 $10.50 - $31.74 $25.39
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company accounts for all stock-based compensation transactions at
fair value. The Company determines the total estimated fair value of
each tranche of stock options as at the date of grant and then
records compensation expense, on an amortized basis, over the
applicable vesting periods of the underlying stock options. As such,
at each reporting date, cumulative compensation expense will be
recognized for each tranche of stock options to the extent that they
are vested.
During the three and nine-month period ended September 30, 2004, the
Company recorded $0.2 million and $0.7 million, respectively
($0.4 million in the same periods, respectively, in 2003), of
compensation expense as part of selling, general and administrative
expenses and recorded a corresponding increase to contributed
surplus. Upon exercise of the underlying stock options recorded at
fair value, (i.e. those issued on or after August 1, 2002), the
Company will record a reduction to contributed surplus and a
corresponding increase in the value attributed to the Class A
Subordinate Voting Shares issued on the exercise of these stock
options.
The balance of contributed surplus related to stock compensation is
as follows:
2004 2003
---------------------------------------------------------------------
(U.S. dollars in thousands)
Opening balance, January 1 $ 572 $ 79
Compensation expense 671 393
---------------------------------------------------------------------
Closing balance, September 30 $ 1,243 $ 472
---------------------------------------------------------------------
---------------------------------------------------------------------
(c) Maximum Number of Shares
The following table presents the maximum number of shares that would
be outstanding if all of the options outstanding at September 30,
2004 were exercised:
Number of Shares
---------------------------------------------------------------------
Class A Subordinate Voting Shares outstanding
at September 30, 2004 18,251,329
Class B Shares outstanding at September 30, 2004 14,223,900
Options to purchase Class A Subordinate Voting Shares 1,481,450
---------------------------------------------------------------------
33,956,679
---------------------------------------------------------------------
---------------------------------------------------------------------
The maximum number of shares reserved to be issued for stock options
is 4,000,000 Class A Subordinate Voting Shares, of which 637,500 are
reserved and unoptioned as at September 30, 2004.
(d) Non-Employee Director Share-Based Compensation Plan
Under this plan, non-employee directors can elect to receive a
portion of their annual retainers and other Board-related
compensation in the form of deferred share units (DSUs) which are
credited to the director's account, and the Company records a
liability. The number of DSUs issued is based upon the market value
of the Company's Class A Subordinate Voting Shares at each allocation
date. Each DSU has a cash value equal to the market price of one of
the Company's Class A Subordinate Voting Shares. Within a specified
time after retirement, non-employee directors receive a cash payment
equal to the market value of their DSUs.
Due to the fact these DSUs will require settlement at some point in
the future for cash, the Company records each allocation of units
issued as compensation expense and records the associated liability
in the period they are issued. The values of all DSUs outstanding,
and the associated liability, are adjusted at each reporting date to
reflect their fair value based on the current market price of the
Company's Class A Subordinate Voting Shares.
During the three and nine-month periods ended September 30, 2004,
$nil and $0.2 million, respectively, ($0.2 million in the same
periods, respectively, ended September 30, 2003) was recorded as
compensation expense (including foreign exchange and the revaluation
of the DSUs to their fair values at the period end) and no amounts
were paid out under this plan. At September 30, 2004, there were
34,041 DSUs (December 31, 2003 - 28,265) having a total value of
$0.8 million (December 31, 2003 - $0.6 million) that were issued and
outstanding.
(e) Other Employee Share-Based Compensation Plan
In conjunction with the appointment of the Company's former President
to the position of Vice Chairman effective May 4, 2004, the Company
created a restricted stock account in his name and credited 32,550
notional units of restricted stock (RSUs) to this account as part of
the overall compensation arrangement for future employment services
to be rendered. Each RSU has a value equivalent to one of the
Company's Class A Subordinate Voting Shares. Under this stock-based
compensation arrangement, the total cash equivalent value of the RSUs
(plus accumulated dividend equivalents) will be paid in cash at a
future date upon satisfaction of certain conditions. Because these
RSUs will require settlement in the future for cash, the Company
initially recognized a liability in the related period that these
RSUs were granted and recognizes the related compensation expense
over the periods that the employment services are rendered. The value
of the associated liability is adjusted at each reporting date to
fair value based on the current market price of the Company's Class A
Subordinate Voting Shares. Compensation expense (including foreign
exchange and the revaluation of the liability to fair value at the
period end) in the three and nine-month periods ended September 30,
2004 totaled $nil and $0.1 million, respectively.
5. Income Taxes
During the Company's second quarter ended June 30, 2004, the Company
completed a series of recapitalization and refinancing transactions
at certain subsidiaries. As a result of these transactions, the
Company recognized $4.0 million in the second quarter as the benefit
for income tax losses available for carryforward (previously
unrecognized) and recorded a corresponding future tax asset in the
amount of $4.0 million in its Austrian subsidiary.
During the Company's third quarter, losses were incurred at the
Company's U.S. subsidiary that were not tax benefited. In deciding
whether it is appropriate to recognize future tax assets based on
future projected operating results, it is generally accepted that the
length of the forecast horizon should be limited to relatively short
periods, for example 2 to 3 years. Our decision to not benefit these
losses at this time is due to the presence of negative operating
trends (consisting mainly of operating issues at one of the Davis
facilities and the escalating impact of steel price increases which
is significantly impacting certain divisions of this subsidiary and
on which the future pricing trend of this commodity over the next 12
to 18 months is highly speculative) that provides uncertainty as to
our ability to generate sufficient future taxable income during a
reasonable forecast period.
6. Segmented Information
The Company currently operates in one industry segment, the
automotive powertrain business, designing and manufacturing parts and
assemblies primarily for the automotive OEMs or their Tier I and Tier
II powertrain component manufacturers.
The Company operates internationally and its manufacturing facilities
are arranged geographically to match the requirements of the
Company's customers in each market. Each manufacturing facility has
the capability to offer many different powertrain parts and
assemblies as the technological processes employed can be used to
make many different parts and assemblies. Additionally, specific
marketing and distribution strategies are required in each geographic
region.
The Company currently operates in four geographic segments, of which
only two are reportable segments. The accounting policies for the
segments are the same as those described in Note 1 to the audited
consolidated financial statements for the year ended December 31,
2003 (as contained in the Company's 2003 Annual Report) and
intersegment sales are accounted for at prices which approximate fair
value.
Executive management assesses the performance of each segment based
on income before income taxes, as the management of income tax
expense is centralized.
The following tables show certain information with respect to
operating segment disclosures:
Three months ended:
North
American European Other
September 30, 2004 Automotive Automotive Automotive Total
-------------------------------------------------------------------------
(U.S. dollars in thousands)
Total Sales $ 259,244 $ 65,437 $ 8,551 $ 333,232
Intersegment sales 8,864 811 31 9,706
-------------------------------------------------------------------------
Sales to external
customers $ 250,380 $ 64,626 $ 8,520 $ 323,526
-------------------------------------------------------------------------
Depreciation and
amortization $ 11,779 $ 2,606 $ 1,127 $ 15,512
-------------------------------------------------------------------------
Interest, net $ 684 $ (701) $ 375 $ 358
-------------------------------------------------------------------------
Income (loss) before
income taxes $ 15,103 $ 6,412 $ (1,168) $ 20,347
-------------------------------------------------------------------------
Capital assets, net $ 254,809 $ 74,459 $ 35,867 $ 365,135
-------------------------------------------------------------------------
Capital asset
additions $ 16,560 $ 5,831 $ 1,330 $ 23,721
-------------------------------------------------------------------------
Goodwill $ 53,489 $ 746 $ - $ 54,235
-------------------------------------------------------------------------
September 30, 2003
-------------------------------------------------------------------------
Total Sales $ 198,124 $ 54,818 $ 6,871 $ 259,813
Intersegment sales 4,951 519 26 5,496
-------------------------------------------------------------------------
Sales to external
customers $ 193,173 $ 54,299 $ 6,845 $ 254,317
-------------------------------------------------------------------------
Depreciation and
amortization $ 9,676 $ 1,981 $ 908 $ 12,565
-------------------------------------------------------------------------
Interest, net $ (766) $ 259 $ 367 $ (140)
-------------------------------------------------------------------------
Income (loss) before
income taxes $ 21,291 $ 2,042 $ (1,869) $ 21,464
-------------------------------------------------------------------------
Capital assets, net $ 197,426 $ 56,660 $ 33,735 $ 287,821
-------------------------------------------------------------------------
Capital asset
additions $ 8,147 $ 1,705 $ 828 $ 10,680
-------------------------------------------------------------------------
Goodwill $ 13,127 $ 699 $ - $ 13,826
-------------------------------------------------------------------------
Nine months ended:
North
American European Other
September 30, 2004 Automotive Automotive Automotive Total
-------------------------------------------------------------------------
(U.S. dollars in thousands)
Total Sales $ 819,144 $ 206,210 $ 26,021 $ 1,051,375
Intersegment sales 24,008 1,760 284 26,052
-------------------------------------------------------------------------
Sales to external
customers $ 795,136 $ 204,450 $ 25,737 $ 1,025,323
-------------------------------------------------------------------------
Depreciation and
amortization $ 33,928 $ 7,770 $ 3,349 $ 45,047
-------------------------------------------------------------------------
Interest, net $ 8 $ (178) $ 1,373 $ 1,203
-------------------------------------------------------------------------
Income (loss) before
income taxes $ 75,327 $ 21,229 $ (3,445) $ 93,111
-------------------------------------------------------------------------
Capital assets, net $ 254,809 $ 74,459 $ 35,867 $ 365,135
-------------------------------------------------------------------------
Capital asset
additions $ 56,558 $ 15,785 $ 5,677 $ 78,020
-------------------------------------------------------------------------
Goodwill $ 53,489 $ 746 $ - $ 54,235
-------------------------------------------------------------------------
September 30, 2003
-------------------------------------------------------------------------
Total Sales $ 622,957 $ 174,537 $ 20,103 $ 817,597
Intersegment sales 14,945 2,003 113 17,061
-------------------------------------------------------------------------
Sales to external
customers $ 608,012 $ 172,534 $ 19,990 $ 800,536
-------------------------------------------------------------------------
Depreciation and
amortization $ 28,093 $ 5,859 $ 2,678 $ 36,630
-------------------------------------------------------------------------
Interest, net $ (2,027) $ 866 $ 945 $ (216)
-------------------------------------------------------------------------
Income (loss) before
income taxes $ 70,528 $ 10,164 $ (3,611) $ 77,081
-------------------------------------------------------------------------
Capital assets, net $ 197,426 $ 56,660 $ 33,735 $ 287,821
-------------------------------------------------------------------------
Capital asset
additions $ 26,563 $ 8,571 $ 8,722 $ 43,856
-------------------------------------------------------------------------
Goodwill $ 13,127 $ 699 $ - $ 13,826
-------------------------------------------------------------------------
7. Related Party Transactions
(a) Transactions with Controlling Shareholder
The Company completed transactions with Magna International Inc.
(Magna), the Company's controlling shareholder, and other companies
under Magna's control as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
---------------------------------------------------------------------
(U.S. dollars in thousands)
Sales(i) $ 2,068 $ 1,501 $ 6,217 $ 5,606
Purchases of
materials(i) $ 819 $ 670 $ 2,635 $ 4,101
Rental of manufacturing
facilities(ii) $ - $ 519 $ - $ 1,877
Affiliation fee(iii) $ 2,916 $ 2,502 $ 9,236 $ 7,868
Social fee(iv) $ 307 $ 316 $ 1,399 $ 1,158
Other specific
charges(v) $ 563 $ 400 $ 1,326 $ 1,304
Interest, net $ 4 $ - $ 8 $ 4
Construction management
fees(ii) $ - $ - $ - $ (1,293)
---------------------------------------------------------------------
(i) Sales to, and purchases from, Magna and other companies under
Magna's control, and the resulting accounts receivable and
payable balances, are typically effected on normal commercial
terms.
(ii) On January 31, 2003, the Company completed a sale and leaseback
transaction with MI Developments Inc. (MID), then a wholly-
owned subsidiary of Magna, for all the land and buildings on
the Tesma Corporate Campus, which includes the corporate office
building and two manufacturing facilities. Under the terms of
the purchase and sale agreement, the land and buildings
comprising the Corporate Campus (with a carrying value of
$23.5 million) were sold to MID for cash proceeds approximating
fair value which totaled $25.0 million. The gain of
$1.5 million resulting from the sale was initially deferred and
is now being amortized on a straight-line basis over the term
of the leases.
Under the terms of this transaction, in the prior year,
$1.3 million of construction management fees (including
carrying charges) previously billed in fiscal 2002 by MID to
the Company on account of this project were refunded. In
addition, the Company entered into agreements to lease the
properties back from MID (at prevailing market rates existing
at inception) for a term of twelve years (with an initial
option to renew for three years followed by two subsequent
five-year renewal options) and is required to make lease
payments of approximately $2.7 million per year. The Company
made rental payments totaling $0.5 million to MID (prior to the
August 29, 2003 reorganization) in the two-month period ended
August 31, 2003 ($1.9 million in the eight-month period ended
August 31, 2003). On August 29, 2003, all of the shares of MID
were distributed to the shareholders of Magna pursuant to a
planned reorganization of Magna. As a result of this
distribution, MID became directly controlled by the same entity
that indirectly controls the Company, such that MID remains a
related party to the Company, but is no longer part of the
group of companies controlled by Magna.
(iii) The Company is party to an affiliation agreement with Magna
that provides for the payment by the Company of an affiliation
fee in exchange for, among other things, a non-exclusive world-
wide license to use certain Magna trademarks, access to Magna
management resources, and the collaboration and sharing of best
practices in areas such as new management techniques, employee
benefits and programs, marketing and technological initiatives.
This agreement became effective for a term of seven years and
five months commencing August 1, 2002 and expires on December
31, 2009 (subject to annual renewals thereafter). Under this
agreement, affiliation fees payable to Magna are calculated as
1.0% of the Company's consolidated net sales, subject to
certain exceptions for sales from acquired businesses (which
are exempt from the calculation of the affiliation fee in the
year of acquisition, with 50% inclusion in the year after
acquisition and full inclusion in all subsequent years).
(iv) Under the terms of a social fee agreement, the Company pays
Magna a social fee of 1.5% of pretax profits as a contribution
to social and charitable programs coordinated by Magna on
behalf of Magna and its affiliated companies, including the
Company. This agreement became effective for a term of seven
years and five months commencing August 1, 2002 and expires on
December 31, 2009 (subject to annual renewals thereafter).
(v) Other specific charges, which are recorded primarily as part of
selling, general and administrative expenses, are negotiated
annually and are based on the level of certain benefits or
services provided to the Company by Magna Services Inc., a
wholly-owned subsidiary of Magna. These services include, but
are not limited to: information technology (WAN infrastructure
and support services), human resource and employee relations
services (including administration of the Employee Equity
Participation and Profit Sharing Program), specialized legal,
environmental, finance and treasury support, management and
technology training, and an allocated share of the facility and
overhead costs dedicated to providing these services.
(b) Other Related Party Transactions
(i) Rental payments to MID in the three and nine-month periods
ended September 30, 2004 amounted to $0.9 million and
$2.6 million, respectively, and were paid under lease
agreements entered into at prevailing market rates. Rental
payments to MID for the one-month period ended September 30,
2003 (subsequent to the August 29, 2003 spin-off) totaled
$0.3 million.
(ii) During 2003, the Company's Austrian subsidiary transferred
certain assets and activities into Magna Systemtechnik AG
(MST), an entity controlled by Magna established for the
training of apprentices in the design, development and
manufacturing of tools, prototypes and automotive components.
Effective the same date, the Company acquired a minority equity
ownership interest in MST and participated in its ongoing
activities to the extent of this equity ownership interest. In
September 2004, the Company sold this equity ownership to a
related company under Magna's control and recorded a gain of
$0.9 million as part of selling, general and administrative
expenses. During the first six months of 2004, the Company
accounted for this investment using the equity method and had
recorded $0.5 million in selling, general and administrative
expenses as the Company's share of the year-to-date net loss of
MST ($0.2 million in the three and nine-month periods ended
September 30, 2003, respectively).
(c) Outstanding Balances
The outstanding balances with all related parties resulting from
transactions included in the consolidated financial statements at the
end of the period are as follows:
September 30 December 31
2004 2003
---------------------------------------------------------------------
(U.S. dollars in thousands)
Accounts receivable $ 1,656 $ 1,560
Accounts payable and other
accrued liabilities $ 923 $ 1,882
---------------------------------------------------------------------
---------------------------------------------------------------------
8. Foreign Exchange
Included as part of selling, general and administrative expenses are
gains (losses) resulting from foreign exchange as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
---------------------------------------------------------------------
(U.S. dollars in thousands)
Foreign exchange
gains $ 306 $ 598 $ 1,066 $ 1,310
---------------------------------------------------------------------
---------------------------------------------------------------------
9. Post-Retirement and Other Long-Term Employee Obligations
In the three and nine-month periods ended September 30, 2004, the
Company recorded expenses of $0.2 million and $0.6 million,
respectively ($0.1 million and $0.3 million in the respective periods
ended September 30, 2003) in relation to the Company's post-
retirement medical benefit plan and other long-term employment
service obligations.
10. Comparative Consolidated Financial Statements
The Company has retroactively restated the comparative consolidated
financial statements for the change in accounting policy for stock-
based compensation as described in Note 1.
Certain other comparative figures have been reclassified to conform
to the current year's method of presentation.
11. Subsequent Event
As announced on October 25, 2004, the Company's board of directors
received a proposal from Magna to acquire all the outstanding Class A
Subordinate Voting Shares of the Company not owned by Magna. Magna
has proposed that the transaction be effected by way of a court-
approved plan of arrangement under Ontario law and is subject to
applicable securities laws, including the Ontario rules governing
going-private transactions of this nature. In addition to court
approval, the transaction would require approval by the Company's
shareholders, including by way of a majority of the votes cast by
holders other than Magna, its affiliates and other insiders.
DIRECTORS
Manfred Gingl Oscar B. Marx, III
Chairman & Chief Executive Officer Corporate Director
Tesma International Inc.
Executive Vice Chairman
Magna International Inc.
Hon. David R. Peterson, P.C., Q.C. Vincent J. Galifi
Chairman Executive Vice President & Chief
Cassels Brock & Blackwell LLP Financial Officer
Magna International Inc.
Judson D. Whiteside Siegfried Wolf
Chairman & Chief Executive Officer Executive Vice Chairman
Miller Thomson LLP Magna International Inc.
Hon. M. Douglas Young, P.C.
Chairman
Summa Strategies Canada Inc
OFFICERS
Manfred Gingl Anthony E. Dobranowski
Chairman & Chief Executive Officer Vice Chairman & Chief Financial
Officer
Klaus Blickle James L. Moulds
President Vice President, Finance & Treasurer
Richard S. MacDonald Stefan T. Proniuk
Vice President, Sales & Marketing Vice President, Secretary & General
Counsel
Karl Steinbauer Thomas More
Vice President, Manufacturing Controller
STOCK LISTINGS TRANSFER AGENTS AND REGISTRARS
Class A Subordinate Voting Shares Class A Subordinate Voting Shares
The Toronto Stock Exchange - TSM.A Canada: Computershare Trust
NASDAQ - TSMA Company of Canada, Toronto
United States: Computershare
Trust Company, Inc.
INVESTOR INFORMATION
Inquiries regarding the Company or to be placed on our supplementary mailing
list, fax list or e-mail list to receive Tesma's annual and quarterly reports
or press releases, please contact Lynn Riley, Manager, Investor Relations at:
Telephone: 905 417-2160 Fax: 905 417-2148 e-mail: lynn.riley@tesma.com
[Tesma logo]
CORPORATE OFFICE LOCATION
1000 Tesma Way, Concord, Ontario, L4K 5R8
Telephone: 905 417-2100 Fax: 905 417-2101 www.tesma.com