MAGNA INTERNATIONAL INC. 
By AURORA, ON,
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THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
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2007 2006 2007 2006
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Sales $ 6,836 $ 6,368 $ 26,067 $ 24,180
Operating income $ 203 $ 42 $ 1,152 $ 792
Net income $ 28 $ 29 $ 663 $ 528
Diluted earnings
per share $ 0.24 $ 0.26 $ 5.86 $ 4.78
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All results are reported in millions of U.S. dollars,
except per share figures.
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YEAR ENDED DECEMBER 31, 2007
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We posted sales of
During 2007, North American and European average dollar content per vehicle increased 11% and 20% respectively, over 2006. During 2007, North American vehicle production declined 2% while European vehicle production increased 3%, each compared to 2006.
Complete vehicle assembly sales decreased 8% to
During 2007, operating income was
During 2007, we generated cash from operations before changes in non-cash
operating assets and liabilities of
THREE MONTHS ENDED
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We posted sales of
During the fourth quarter of 2007, North American and European average dollar content per vehicle increased 13% and 26% respectively, over the comparable quarter in 2006. During the fourth quarter of 2007, North American vehicle production increased by 1% and European vehicle production declined 1%, each compared to the fourth quarter of 2006.
Complete vehicle assembly sales decreased 21% to
During the fourth quarter of 2007, operating income was
During the three months ended
UNUSUAL ITEMS
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During the years ended
Three months ended Year ended
December 31, December 31,
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2007 2006 2007 2006
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Operating Income $ (32) $ (91) $ (45) $ (148)
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Net Income $ (144) $ (80) $ (183) $ (116)
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Earnings per share $ (1.21) $ (0.73) $ (1.61) $ (1.04)
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A more detailed discussion of our consolidated financial results for the
fourth quarter and year ended
DIVIDEND
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Yesterday, our Board of Directors declared a quarterly dividend with
respect to our outstanding Class A Subordinate Voting Shares and Class B
Shares for the quarter ended
UPDATED 2008 OUTLOOK
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For the full year 2008, we expect our consolidated sales to be between
In addition, we expect that full year 2008 spending for fixed assets will
be in the range of
This 2008 outlook assumes no significant acquisitions or divestitures, and no significant labour disruptions in our principal markets. In addition, we have assumed that foreign exchange rates for the most common currencies in which we conduct business relative to our U.S. dollar reporting currency will approximate current rates.
We are a leading global supplier of technologically advanced automotive
systems, assemblies, modules and components. We design, develop and
manufacture automotive systems, assemblies, modules and components, and
engineer and assemble complete vehicles, primarily for sale to original
equipment manufacturers ("OEMs") of cars and light trucks in
We have approximately 84,000 employees in 241 manufacturing operations and 62 product development and engineering centres in 23 countries.
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We will hold a conference call for interested analysts and shareholders
to discuss our fourth quarter results on Wednesday, February 27, 2008 at
8:00 a.m. EST. The conference call will be chaired by Vincent J. Galifi,
Executive Vice-President and Chief Financial Officer. The number to use
for this call is 1-800-940-0570. The number for overseas callers is
1-212-231-2900. Please call in 10 minutes prior to the call. We will also
webcast the conference call at www.magna.com. The slide presentation
accompanying the conference call will be available on our website
Wednesday morning prior to the call.
For further information, please contact Louis Tonelli, Vice-President,
Investor Relations at 905-726-7035.
For teleconferencing questions, please call Karin Kaminski 905-726-7103
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FORWARD-LOOKING STATEMENTS
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The previous discussion may contain statements that, to the extent that
they are not recitations of historical fact, constitute "forward-looking
statements" within the meaning of applicable securities legislation.
Forward-looking statements may include financial and other projections, as
well as statements regarding our future plans, objectives or economic
performance, or the assumptions underlying any of the foregoing. We use words
such as "may", "would", "could", "will", "likely", "expect", "anticipate",
"believe", "intend", "plan", "forecast", "project", "estimate" and similar
expressions to identify forward-looking statements. Any such forward-looking
statements are based on assumptions and analyses made by us in light of our
experience and our perception of historical trends, current conditions and
expected future developments, as well as other factors we believe are
appropriate in the circumstances. However, whether actual results and
developments will conform with our expectations and predictions is subject to
a number of risks, assumptions and uncertainties. These risks, assumptions and
uncertainties include, without limitation: shifting OEM market shares,
declining production volumes and changes in consumer demand for vehicles; a
reduction in the production volumes of certain vehicles, such as certain light
trucks; our ability to compete with suppliers with operations in low cost
countries; our ability to offset price concessions demanded by our customers;
our dependence on outsourcing by our customers; our ability to offset
increases in the cost of commodities, such as steel and resins, as well as
energy prices; fluctuations in relative currency values; changes in our mix of
earnings between jurisdictions with lower tax rates and those with higher tax
rates, as well as our ability to fully benefit tax losses; other potential tax
exposures; the financial distress of some of our suppliers and customers; the
inability of our customers to meet their financial obligations to us; the
termination or non-renewal by our customers of any material contracts; our
ability to fully recover pre-production expenses; warranty and recall costs;
product liability claims in excess of our insurance coverage; expenses related
to the restructuring and rationalization of some of our operations; impairment
charges; our ability to successfully identify, complete and integrate
acquisitions; risks associated with program launches; legal claims against us;
risks of conducting business in foreign countries, including
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For further information about Magna, please see our website at
www.magna.com. Copies of financial data and other publicly filed
documents are available through the internet on the Canadian Securities
Administrators' System for Electronic Document Analysis and Retrieval
(SEDAR) which can be accessed at www.sedar.com and on the United States
Securities and Exchange Commission's Electronic Data Gathering, Analysis
and Retrieval System (EDGAR) which can be accessed at www.sec.gov.
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MAGNA INTERNATIONAL INC.
Management's Discussion and Analysis of Results of Operations and
Financial Position
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All amounts in this Management's Discussion and Analysis of Results of Operations and Financial Position ("MD&A") are in U.S. dollars and all tabular amounts are in millions of U.S. dollars, except per share figures and average dollar content per vehicle, which are in U.S. dollars, unless otherwise noted. When we use the terms "we", "us", "our" or "Magna", we are referring to Magna International Inc. and its subsidiaries and jointly controlled entities, unless the context otherwise requires.
This MD&A should be read in conjunction with the unaudited interim
consolidated financial statements for the three months and year ended
This MD&A has been prepared as at February 25, 2008.
OVERVIEW
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We are a leading global supplier of technologically advanced automotive
systems, assemblies, modules and components. We design, develop and
manufacture automotive systems, assemblies, modules and components, and
engineer and assemble complete vehicles, primarily for sale to original
equipment manufacturers ("OEMs") of cars and light trucks in
Our operations are segmented on a geographic basis between
HIGHLIGHTS
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We are pleased with our 2007 results, including higher sales, average
dollar content per vehicle in both
In addition to the launch or ramp-up of new business, our improved results
reflect operating efficiencies we realized at some of our facilities and
progress we made at certain underperforming divisions. Despite the many
positives we achieved, 2007 also proved to be a difficult year in a number of
respects. In addition to the industry challenges mentioned above, we continued
to incur losses at a number of underperforming facilities, particularly at
certain powertrain and interiors facilities in
Although no significant acquisitions or dispositions were made during
2007, we completed a plan of arrangement with Russian Machines and signed a
unique Framework of Fairness Agreement with the Canadian Auto Workers' union.
We also completed a substantial issuer bid pursuant to which we purchased for
cancellation 11.9 million Class A Subordinate Voting Shares. In addition to
the substantial issuer bid, we also purchased 2.7 million Class A Subordinate
Voting Shares under an ongoing normal course issuer bid, which allows for the
purchase of an additional 6.3 million shares before its expiry on
We ended 2007 with a strong balance sheet, including a substantial net cash position. We expect that our net cash will help us "weather the storm" in the industry and provide opportunities to continue to grow our business and further enhance shareholder value.
During 2007, we recorded sales of
We reported strong sales in 2007 despite the fact that two of our largest
customers in
Operating income for 2007 increased 45% or
Net income for 2007 increased 26% or
Diluted earnings per share for 2007 increased 23% or
UNUSUAL ITEMS
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During 2007 and 2006, we recorded certain unusual items as follows:
2007 2006
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Diluted Diluted
Operating Net Earnings Operating Net Earnings
Income Income per Share Income Income per Share
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Impairment
charges(1) $ (56) $ (40) $ (0.35) $ (54) $ (46) $ (0.41)
Restructuring
charges(2) (39) (27) (0.24) (77) (65) (0.58)
Sale of
facilities(3) (12) (7) (0.06) (17) (15) (0.14)
Sale of
property(4) 36 30 0.26 - - -
Foreign
currency
gain(4) 26 24 0.21 - - -
Valuation
allowance on
future tax
assets(5) - (115) (1.01) - - -
Future tax
(charge)
recovery(5) - (48) (0.42) - 10 0.09
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Total unusual
items $ (45) $ (183) $ (1.61) $ (148) $ (116) $ (1.04)
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(1) Impairment Charges
In conjunction with our annual goodwill impairment analysis and
consideration of other indicators of impairment of our long-lived
assets at certain operations, we have recorded long-lived asset
impairment charges as follows:
2007 2006
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Operating Net Operating Net
Income Income Income Income
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Europe $ 12 $ 12 $ 41 $ 38
North America 44 28 13 8
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$ 56 $ 40 $ 54 $ 46
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Europe
Due to recurring losses that were projected to continue as a result
of existing sales levels and limited sales growth prospects, during
2007 we recorded asset impairments of $12 million relating to certain
assets and facilities in Germany, Austria, the Czech Republic and
Spain.
During 2006, we recorded asset impairments of $41 million related to
certain assets and facilities due to recurring losses that were
projected to continue as a result of existing sales levels and
limited sales growth prospects. Asset impairments were recorded at an
exterior systems facility in Germany, a powertrain systems facility
in Austria, interior systems facilities in the United Kingdom and
Spain and a seating systems facility in the Czech Republic.
North America
During 2007, we recorded asset impairments of $44 million related to
an interiors systems facility in the United States and certain
powertrain facilities in the United States and Canada. The asset
impairments were recorded as a result of: (i) ceasing operations
and/or use of certain assets at two powertrain facilities; and (ii)
losses that were projected to be incurred throughout the business
planning period based on existing and projected sales levels.
During 2006, we recorded asset impairments of $13 million related to
certain interior systems facilities in the United States. The asset
impairments were recorded as a result of losses that were projected
to be incurred throughout our business planning period based on
existing and projected sales levels.
(2) Restructuring Charges
Europe
During 2007, we recorded restructuring charges of $4 million related
to the closure of a sunvisors facility in Spain. During 2006, we
recorded restructuring charges of $43 million related primarily to
closure costs of a mirrors facility in Ireland and an exterior
systems facility in Belgium.
North America
In North America, restructuring charges totalled $35 million for 2007
and $34 million for 2006. Specifically, in 2007 we recorded
$12 million related to the closure of exterior systems facilities in
Canada and the United States, $10 million related to the
consolidation of powertrain facilities in Canada and $9 million
related to the closure of a mirror facility in the United States. The
balance of restructuring and rationalization charges related to a
stamping facility in the United States.
The restructuring charges in 2006 related primarily to rightsizing a
powertrain facility in the United States and restructuring and
rationalization charges related primarily to certain powertrain and
seating facilities in the United States.
In addition, we may incur additional restructuring and
rationalization charges during 2008.
(3) Sale of Facilities
During 2007, we entered into an agreement to sell an underperforming
exterior systems facility in Germany. As a result, we incurred a
$12 million loss on disposition of the facility. During 2006, we sold
two underperforming powertrain facilities, which resulted in losses
on disposition of $12 million and $5 million in Europe and North
America, respectively.
(4) Other Unusual Items
During 2007 we recorded the following unusual items:
- we disposed of land and building in the United Kingdom and
recorded a gain on disposal of $36 million; and
- a $26 million foreign currency gain on the repatriation of funds
from Europe.
(5) Income Taxes
In conjunction with our annual goodwill and long-lived asset
impairment analyses, during the fourth quarter of 2007, we recorded a
$115 million charge to establish valuation allowances against certain
of our future tax assets in the United States.
Accounting standards require that we assess whether valuation
allowances should be established against our future income tax assets
based on the consideration of all available evidence using a "more
likely than not" standard. The factors we use to assess the
likelihood of realization are our past history of earnings, forecast
of future taxable income and available tax planning strategies that
could be implemented to realize the future tax assets. During 2007,
we determined that valuation allowances were required in the United
States based on:
- three year historical cumulative losses at our interior systems
and powertrain operations;
- the deterioration of near-term automotive market conditions in the
United States; and
- significant and inherent uncertainty as to the timing of when we
would be able to generate the necessary level of earnings to
recover these future tax assets.
Also during 2007, we recorded a $53 million charge to future income
tax expense as a result of an alternative minimum tax introduced in
Mexico, offset in part by a $5 million future income tax recovery
related to a reduction in future income tax.
During 2006, we recorded a $10 million future income tax recovery as
a result of a reduction in future income tax rates in Canada.
CAPITAL TRANSACTIONS
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During 2007, following approval by our Class A and Class B shareholders,
we completed the court-approved plan of arrangement (the "Arrangement")
whereby OJSC Russian Machines ("Russian Machines"), a wholly owned subsidiary
of Basic Element Limited ("Basic Element"), made a major strategic investment
in Magna. Russian Machines represents the Machinery Sector of Basic Element,
and includes automobile manufacturer GAZ Group, airplane manufacturer Aviacor
and train car manufacturer Abakanvagonmash. Basic Element is a diversified
holding company founded in 1997 with assets in
In accordance with the Arrangement:
- Russian Machines invested $1.54 billion to indirectly acquire
20 million of our Class A Subordinate Voting Shares from treasury.
- We purchased 217,400 Class B Shares for cancellation, representing
all of our outstanding Class B Shares, other than those indirectly
controlled by the Stronach Trust, for $24 million and the number of
votes per each Class B Share was reduced from 500 votes to 300 votes.
- The Stronach Trust and certain members of our executive management
combined their respective shareholdings in Magna (in the case of
executive management, a portion of their shareholdings), together
with the 20 million Class A Subordinate Voting Shares issued as part
of the Arrangement into a new Canadian holding company, M Unicar Inc.
("M Unicar"). At September 20, 2007, M Unicar indirectly held 100% of
our outstanding Class B Shares and approximately 16% of our
outstanding Class A Subordinate Voting Shares collectively
representing approximately 68.8% of the votes attached to all the
Class A Subordinate Voting Shares and Class B Shares then
outstanding.
On
On
INDUSTRY TRENDS AND RISKS
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A number of trends continue to have a significant impact on the global automotive industry and our business, including:
- declining North American production volumes;
- the increasing market share of Asian-based OEMs in North America and
Europe and the declining market share and deteriorating financial
condition of some of our traditional customers in these markets;
- the exertion of significant pricing pressure, primarily by North
American and European OEMs, including through pre-determined price
concessions, significant demands for retroactive price reductions and
increased transfer of warranty costs, design and engineering
expenses, as well as tooling costs;
- increased exposure to prices for steel, resin, paints/chemicals and
other raw materials and commodities, as well as energy prices;
- the deteriorating financial condition of the automotive supply base,
particularly in North America, and the corresponding increase in
operational and financial exposure as many such suppliers become
bankrupt or insolvent;
- the growth of the automotive industry in China, Korea, Thailand,
India, Russia, Brazil and other low cost countries, and the migration
of component and vehicle design, development, engineering and
manufacturing to such lower cost countries;
- growth of the A to D vehicle segments (micro to mid-size cars),
particularly in emerging markets;
- the increasing prevalence of vehicles built off high-volume global
vehicle platforms; and
- increasing customer and consumer demand for lighter, more fuel-
efficient and environmentally-friendly vehicles, with additional
safety features, improved comfort, convenience and space optimization
features and advanced electronics systems.
The following are some of the more significant risks that could affect our ability to achieve our desired results:
- The global automotive industry is cyclical and consumer demand for
automobiles is sensitive to changes in economic and political
conditions, including interest rates, energy prices and international
conflicts (including acts of terrorism). Automotive production is
affected by consumer demand and may be affected by the foregoing
macro factors as well as structural factors such as labour relations
issues, regulatory requirements, trade agreements and similar
matters. As a result of these and other factors, some of our
customers are currently experiencing and/or may in the future
experience reduced consumer demand for their vehicles, leading to
declining vehicle production volumes, which could have a material
adverse effect on our profitability.
- Although we supply parts to all of the leading OEMs, a significant
majority of our sales are to five such customers, three of which are
rated as below investment grade by credit rating agencies. We are
attempting to further diversify our customer base, particularly to
increase our business with Asian-based OEMs. A decline in overall
production volumes by any of our five largest customers could have an
adverse effect on our profitability, particularly if we are unable to
further diversify our customer base.
- While we supply parts for a wide variety of vehicles produced in
North America and Europe, we do not supply parts for all vehicles
produced, nor is the number or value of parts evenly distributed
among the vehicles for which we do supply parts. Shifts in market
share among vehicles (including shifts away from vehicles we
assemble) or the early termination, loss, renegotiation of the terms
of, or delay in, the implementation of any significant production or
assembly contract could have a material adverse effect on our
profitability.
- The financial condition of some of our traditional customers has
deteriorated in recent years due in part to high labour costs
(including healthcare, pension and other post-employment benefit
costs), high raw materials, commodities and energy prices, declining
sales and other factors. Additionally, increased gas prices, have
affected and could further threaten sales of certain of their models,
such as full-size sport utility vehicles and light trucks. All of
these conditions, coupled with a continued decline in market share,
could further threaten the financial condition of some of our
customers, putting additional pressure on us to reduce our prices and
exposing us to greater credit risk. In the event that our customers
are unable to satisfy their financial obligations or seek protection
from their creditors, we may incur additional expenses as a result of
such credit exposure, which could have a material adverse effect on
our profitability and financial condition.
- We have entered into, and will continue to enter into, long-term
supply arrangements with our customers which provide for, among other
things, price concessions over a pre-defined supply term. To date,
these concessions have been fully or partially offset by cost
reductions arising principally from product and process improvements
and price reductions from our suppliers. However, the competitive
automotive industry environment in North America, Europe and Asia has
caused these pricing pressures to intensify. Some of our customers
have demanded and will likely continue to demand additional price
concessions and/or retroactive price reductions. We may not be
successful in offsetting all of these price concessions or reductions
through improved operating efficiencies, reduced expenditures or
reduced prices from our suppliers. To the extent that we are not able
to offset price concessions through cost reductions or improved
operating efficiencies, such concessions could have a material
adverse effect on our profitability. To the extent we refuse to make
price concessions to our customers they may not award new business to
us, which could also have a material adverse effect on our
profitability.
- We continue to be pressured to absorb costs related to product
design, engineering and tooling, as well as other items previously
paid for directly by OEMs. In particular, some OEMs have requested
that we pay for design, engineering and tooling costs that are
incurred prior to the start of production and recover these costs
through amortization in the piece price of the applicable component.
Some of these costs cannot be capitalized, which could have an
adverse effect on our profitability until the programs in respect of
which they have been incurred are launched. In addition, since our
contracts generally do not include any guaranteed minimum purchase
requirements, if estimated production volumes are not achieved, these
costs may not be fully recovered, which could have an adverse effect
on our profitability.
- Our customers continue to demand that we bear the cost of the repair
and replacement of defective products which are either covered under
their warranty or are the subject of a recall by them. Warranty
provisions are established based on our best estimate of the amounts
necessary to settle existing or probable claims on product defect
issues. Recall costs are costs incurred when government regulators
and/or our customers decide to recall a product due to a known or
suspected performance issue, and we are required to participate
either voluntarily or involuntarily. Currently, under most customer
agreements, we only account for existing or probable warranty claims.
Under certain complete vehicle engineering and assembly contracts, we
record an estimate of future warranty-related costs based on the
terms of the specific customer agreements and the specific customer's
warranty experience. The obligation to repair or replace such
products could have a material adverse effect on our profitability
and financial condition if the actual costs are materially different
from such estimates.
- Prices for key raw materials and commodities used in our parts
production, particularly steel, resin, paints chemicals and other raw
materials, as well as energy prices, remain at elevated levels
compared to levels earlier this decade, with the possibility of
further increases in the future. We have attempted to mitigate our
exposure to commodities price increases, however, to the extent we
are unable to fully do so through hedging strategies, by engineering
products with reduced commodity content, by passing commodity price
increases to our customers or otherwise, such additional commodity
costs could have a material adverse effect on our profitability.
- We rely on a number of suppliers to supply us with a wide range of
components required in connection with our business. Economic
conditions, intense pricing pressures, increased commodity prices and
a number of other factors have left many automotive suppliers in
varying degrees of financial distress. The continued financial
distress or the insolvency or bankruptcy of any such supplier could
disrupt the supply of components to us or our customers, potentially
causing the temporary shut-down of our or our customers' production
lines. Any prolonged disruption in the supply of critical components
to us or our customers, the inability to re-source production of a
critical component from a financially distressed automotive
components sub-supplier, or any temporary shut-down of one of our
production lines or the production lines of one of our customers,
could have a material adverse effect on our profitability.
Additionally, the insolvency, bankruptcy or financial restructuring
of any of our critical suppliers could result in us incurring
unrecoverable costs related to the financial work-out of such
suppliers and/or increased exposure for product liability, warranty
or recall costs relating to the components supplied by such suppliers
to the extent such supplier is not able to assume responsibility for
such amounts, which could have an adverse effect on our
profitability.
- We are dependent on the outsourcing of components, modules and
assemblies, as well as complete vehicles, by OEMs. The extent of OEM
outsourcing is influenced by a number of factors, including relative
cost, quality and timeliness of production by suppliers as compared
to OEMs, capacity utilization, and labour relations among OEMs, their
employees and unions. As a result of favourable terms in collective
bargaining agreements concluded in 2007, the "Detroit 3" OEMs may
insource some production which had previously been outsourced.
Outsourcing of complete vehicle assembly is particularly dependent on
the degree of unutilized capacity at the OEMs' own assembly
facilities, in addition to the foregoing factors. A reduction in
outsourcing by OEMs, or the loss of any material production or
assembly programs coupled with the failure to secure alternative
programs with sufficient volumes and margins, could have a material
adverse effect on our profitability.
- The competitive environment in the automotive industry has been
intensifying as our customers seek to take advantage of lower
operating costs in China, Korea, Thailand, India, Russia, Brazil and
other low cost countries. As a result, we are facing increased
competition from suppliers that have manufacturing operations in low
cost countries. While we continue to expand our manufacturing
footprint with a view to taking advantage of manufacturing
opportunities in low cost countries, we cannot guarantee that we will
be able to fully realize such opportunities. Additionally, the
establishment of manufacturing operations in emerging market
countries carries its own risks, including those relating to
political and economic instability; trade, customs and tax risks;
currency exchange rates; currency controls; insufficient
infrastructure; and other risks associated with conducting business
internationally. The loss of any significant production contract to a
competitor in low cost countries or significant costs and risks
incurred to enter and carry on business in these countries could have
an adverse effect on our profitability.
- Although our financial results are reported in U.S. dollars, a
significant portion of our sales and operating costs are realized in
Canadian dollars, euros, British pounds and other currencies. Our
profitability is affected by movements of the U.S. dollar against the
Canadian dollar, the euro, the British pound and other currencies in
which we generate revenues and incur expenses. However, as a result
of hedging programs employed by us, primarily in Canada, foreign
currency transactions are not fully impacted by the recent movements
in exchange rates. We record foreign currency transactions at the
hedged rate where applicable. Despite these measures, significant
long-term fluctuations in relative currency values, in particular a
significant change in the relative values of the U.S. dollar,
Canadian dollar, euro or British pound, could have an adverse effect
on our profitability and financial condition and any sustained
changes in such related currency values could adversely impact our
competitiveness in certain geographic regions.
- Contracts from our customers consist of blanket purchase orders which
generally provide for the supply of a customer's annual requirements
for a particular vehicle, instead of a specified quantity of
products. These blanket purchase orders can be terminated by a
customer at any time and, if terminated, could result in us incurring
various pre-production, engineering and other costs which we may not
recover from our customer and which could have an adverse effect on
our profitability.
- In response to the increasingly competitive automotive industry
conditions, it is likely that we may further rationalize some of our
production facilities. In the course of such rationalization, we will
incur further restructuring costs related to plant closings,
relocations and employee severance costs. Such costs could have an
adverse effect on our short-term profitability. In addition, we are
working to turn around financially underperforming divisions,
however, there is no guarantee that we will be successful in doing so
with respect to some or all such divisions.
- We recorded significant impairment charges related to goodwill,
future tax assets and fixed assets in recent years and may continue
to do so in the future. Goodwill must be tested for impairment
annually, or more frequently when an event occurs that more likely
than not reduces the fair value of a reporting unit below its
carrying value. We also evaluate our ability to realize future tax
assets and fixed assets and other long-lived assets for impairment
whenever indicators of impairment exist. The bankruptcy of a
significant customer or the early termination, loss, renegotiation of
the terms of, or delay in the implementation of any significant
production contract could be indicators of impairment. In addition,
to the extent that forward-looking assumptions regarding the impact
of improvement plans on current operations, insourcing and other new
business opportunities, program price and cost assumptions on current
and future business, the timing of new program launches and future
forecasted production volumes are not met, any resulting impairment
loss could have a material adverse effect on our profitability.
- We have completed a number of significant acquisitions in recent
years and may continue to do so in the future. In those product areas
in which we have identified acquisitions as critical to our business
strategy, we may not be able to identify suitable acquisition targets
or successfully acquire any suitable targets which we identify.
Additionally, we may not be able to successfully integrate or achieve
anticipated synergies from those acquisitions which we do complete
and such failure could have a material adverse effect on our
profitability.
- From time to time, we are awarded new or takeover business by our
customers. The launch of new business is a complex process, the
success of which is dependent on a wide range of factors, including
the production readiness of manufacturing space, as well as issues
relating to manufacturing processes, tooling, equipment and sub-
suppliers. Our failure to successfully launch material new or
takeover business could have an adverse effect on our profitability.
- From time to time, we may become liable for legal, contractual and
other claims by various parties, including, customers, suppliers,
former employees, class action plaintiffs and others. On an ongoing
basis, we attempt to assess the likelihood of any adverse judgments
or outcomes to these claims, although it is difficult to predict
final outcomes with any degree of certainty. At this time, we do not
believe that any of the claims to which we are party will have a
material adverse effect on our financial position, however, we cannot
provide any assurance to this effect.
RESULTS OF OPERATIONS
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Accounting Change
In
Financial Instruments
Under the new standards, all of our financial assets and financial liabilities are classified as held for trading, held to maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. Held for trading financial instruments, which include cash and cash equivalents, are measured at fair value and all gains and losses are included in net income in the period in which they arise. Held to maturity investments are recorded at amortized cost using the effective interest method, and include long-term interest bearing government securities held to partially fund certain Austrian lump sum termination and long service payment arrangements and our investment in asset-backed commercial paper ("ABCP"). Loans and receivables, which include accounts receivable and long-term receivables, accounts payable, accrued salaries and wages, and certain other accrued liabilities are recorded at amortized cost using the effective interest method. We do not currently have any available for sale financial assets.
Comprehensive Income
Other comprehensive income includes the unrealized gains and losses on translation of our net investment in self-sustaining foreign operations, and to the extent that cash flow hedges are effective, the change in their fair value, net of income taxes. Other comprehensive income is presented below net income on the Consolidated Statements of Income and Comprehensive Income. Comprehensive income is composed of our net income and other comprehensive income.
Accumulated other comprehensive income is a separate component of shareholders' equity, which includes the accumulated balances of all components of other comprehensive income which are recognized in comprehensive income but excluded from net income.
Hedges
Previously, under Canadian GAAP derivative financial instruments that met hedge accounting criteria were accounted for on an accrual basis, and gains and losses on hedge contracts were accounted for as a component of the related hedged transaction. The new standards require that all derivative instruments, whether designated in hedging relationships or not, be recorded on the balance sheet at fair value. The fair values of derivatives are recorded in other assets or other liabilities. To the extent that cash flow hedges are effective, the change in their fair value is recorded in other comprehensive income. Amounts accumulated in other comprehensive income are reclassified to net income in the period in which the hedged item affects net income.
The impact of these accounting policy changes on the consolidated balance
sheet as at
Increase in prepaid expenses and other $ 28
Increase in other assets 17
Increase in future tax assets 14
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Increase in other accrued liabilities $ 32
Increase in other long-term liabilities 17
Increase in future tax liabilities 13
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Decrease in accumulated other comprehensive income $ 3
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Average Foreign Exchange
For the three months For the year
ended December 31, ended December 31,
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2007 2006 Change 2007 2006 Change
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1 Canadian
dollar equals
U.S. dollars 1.019 0.877 + 16% 0.936 0.882 + 6%
1 euro equals
U.S. dollars 1.450 1.292 + 12% 1.371 1.257 + 9%
1 British pound
equals U.S.
dollars 2.044 1.920 + 7% 2.001 1.845 + 8%
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The preceding table reflects the average foreign exchange rates between
the most common currencies in which we conduct business and our U.S. dollar
reporting currency. The significant changes in these foreign exchange rates
for the three months and year ended
The results of operations whose functional currency is not the U.S. dollar are translated into U.S. dollars using the average exchange rates in the table above for the relevant period. Throughout this MD&A, reference is made to the impact of translation of foreign operations on reported U.S. dollar amounts where relevant.
Our results can also be affected by the impact of movements in exchange
rates on foreign currency transactions (such as raw material purchases or
sales denominated in foreign currencies). However, as a result of hedging
programs employed by us, primarily in
Finally, holding gains and losses on foreign currency denominated monetary items, which were recorded in selling, general and administrative expenses, impact reported results.
RESULTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2007
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Sales
2007 2006 Change
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Vehicle Production Volumes
(millions of units)
North America 15.102 15.335 - 2%
Europe 15.938 15.536 + 3%
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Average Dollar Content Per Vehicle
North America $ 859 $ 775 + 11%
Europe $ 435 $ 362 + 20%
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Sales
External Production
North America $ 12,977 $ 11,883 + 9%
Europe 6,936 5,624 + 23%
Rest of World 411 269 + 53%
Complete Vehicle Assembly 4,008 4,378 - 8%
Tooling, Engineering and Other 1,735 2,026 - 14%
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Total Sales $ 26,067 $ 24,180 + 8%
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