Decoma announces financial results for third quarter 2003 Strong
Content Per Vehicle Growth from Recent Acquisitions and New
Facility Start-ups CONCORD, ON, Nov. 4 /PRNewswire-FirstCall/ --
Decoma International Inc. (TSX:DEC.A; NASDAQ:DECA) today announced
financial results for the third quarter ended September 30, 2003.
Financial Highlights -------------------- (US$, in millions except
Three Months Nine Months per share figures) Ended September 30,
Ended September 30, 2003 2002 2003 2002 Sales $ 556.4 $ 465.5 $
1,709.7 $ 1,528.5 Operating income $ 28.9 $ 36.1 $ 132.8 $ 131.0
Net income $ 14.8 $ 18.6 $ 75.9 $ 69.9 Diluted earnings per share $
0.16 $ 0.21 $ 0.80 $ 0.78 Weighted average diluted shares
outstanding 106.4 98.4 103.5 98.3 Commenting on the above results,
Al Power, Decoma's President and Chief Executive Officer, said:
"These results are in line with management expectations and our
previous guidance for the full 2003 year. Despite lower overall
production volumes during the third quarter, we continued to
increase sales and content per vehicle as the result of recent
acquisitions, new facility start-ups, new programs and takeover
contracts. Lower income for the quarter reflects the substantial
investments we are making in new facilities to support future sales
and earnings growth, the impact of program changeovers, continuing
OEM pricing pressures and the impact of performance issues at
certain European facilities which we are proactively addressing."
Results of Operations --------------------- Total sales increased
20% to $556.4 million in the third quarter and by 12% to $1,709.7
million for the nine month period ended September 30, 2003. Third
quarter 2003 sales included a positive impact of approximately
$41.8 million as a result of currency translation. Excluding the
impact of currency translation, sales grew $49.1 million or 10%.
During the third quarter of 2003, vehicle production volumes
declined 3% in North America and remained level in Europe. Despite
lower volumes, Decoma's production sales increased 10% in North
America and 23% in Europe, while average content per vehicle
increased 16% to $94 in North America and 24% to $42 in Europe.
Decoma's sales and content growth in North America was driven by
the translation of Canadian dollar sales into the Company's U.S.
dollar reporting currency, which added approximately $25.2 million
to production sales and $7 to content, as well as the recent
acquisition of Federal Mogul's original equipment automotive
lighting operations, which added $16.5 million to production sales
and $5 to North American content per vehicle. Sales and content
growth also benefited from new takeover business, sales on programs
launched during or subsequent to the third quarter of 2002 and
strong volumes on certain high content production programs. In
Europe, sales and content growth were driven by recent new
facilities added in the latter part of 2002 and early 2003. New
facility start-ups in Germany, Poland and Austria, along with the
takeover of an existing facility in Belgium, added approximately
$26.8 million to production sales and $7 to European content per
vehicle during the third quarter. European sales and content growth
also benefited from the translation of Euro and British Pound sales
into the Company's U.S. dollar reporting currency, which added
approximately $14.3 million to production sales and $4 to content
during the period. Operating income in the third quarter of 2003
declined to $28.9 million, compared with $36.1 million for the same
period last year. These results primarily reflect losses incurred
during the quarter at certain European operations. To address these
efficiency and performance issues, Robert Brownlee, Decoma's
President of North American Fascia Operations, has assumed
management responsibility for Decoma's European operations. In
respect of the Company's UK operations, operating losses at the
Company's Merplas facility in the United Kingdom continued to
improve during the third quarter. The decline in operating income
for the third quarter also reflects the impact of costs incurred to
support future sales growth and investments in new facilities in
the southern U.S., Belgium and Poland. Finally, the impact on
operating income of program changeovers, lower production volumes
on certain high-content programs, continued OEM customer pricing
pressures and foreign exchange losses negatively impacted results.
Operating income for the nine month period ended September 30, 2003
increased to $132.8 million, compared to $131.0 million for the
same period last year. Net income for the third quarter of 2003 was
$14.8 million ($0.16 per diluted share), compared to $18.6 million
($0.21 per diluted share) for the third quarter of 2002. Net income
for the nine month period September 30, 2003 increased to $75.9
million ($0.80 per diluted share), compared with $69.9 million
($0.78 per diluted share) for the comparable period in 2002.
Capital spending increased in the third quarter of 2003 reflecting
substantial investments in new facilities to support the Company's
future growth. Capital spending, excluding acquisition spending,
totalled $49.1 million in the third quarter of 2003 and $120.3
million for the nine month period ended September 30, 2003.
Quarterly Dividend ------------------ At its meeting today,
Decoma's Board of Directors declared a third quarter 2003 dividend
of US$0.07 per share on Class A Subordinate Voting and Class B
Shares payable on December 15, 2003 to shareholders of record on
November 28, 2003. Outlook ------- Commenting on the Company's
outlook, Randy Smallbone, Decoma's Executive Vice President and
Chief Financial Officer, said: "While significant investments in
new facilities and program changeovers will continue to impact our
results, these investments are positioning Decoma for future
growth. Although we continue to face challenges in Europe, we
believe that the corrective actions we have taken will have a
significant impact on our ability to address these issues moving
forward". Full Year 2003 -------------- Decoma's outlook for full
year vehicle production remains unchanged from prior guidance. The
Company estimates that North American light vehicle production
volumes will be approximately 15.9 million units in 2003, or
approximately 2% lower than 2002. Decoma estimates that European
production volumes will be approximately 16.0 million units, also
approximately 2% lower than 2002 volumes. Decoma's content per
vehicle for 2003 is expected to be in the range of $90 to $92 in
North America and between $39 and $41 in Europe. Based on these
assumptions and the factors discussed in the "Outlook" section of
the Management's Discussion and Analysis of Results of Operations
and Financial Position ("MD&A") attached to this press release,
the Company expects its full year 2003 sales to range between
$2,275 million to $2,360 million, which is unchanged from prior
guidance. Approved capital spending for the year remains at $195
million. Diluted earnings per share for 2003, before possible
charges, if any, related to the Company's United Kingdom review and
its continental Europe review (more fully discussed in the attached
MD&A), is also expected to be within our previous guidance of
$0.92 to $1.04. Forward Looking Information
--------------------------- This press release contains "forward
looking statements" within the meaning of applicable securities
legislation. Readers are cautioned that such statements are only
predictions and involve important risks and uncertainties that may
cause actual results or anticipated events to be materially
different from those expressed or implied herein. In this regard,
readers are referred to the Company's Annual Information Form for
the year ended December 31, 2002, filed with the Canadian
securities commissions and as an annual report on Form 40-F with
the United States Securities and Exchange Commission, and
subsequent public filings, and the discussion of risks and
uncertainties set out in the "Forward Looking Statements" section
of the MD&A for the three and nine month periods ended
September 30, 2003, which is attached to this press release. The
Company disclaims any intention and undertakes no obligation to
update or revise any forward looking statements to reflect
subsequent information, events or circumstances or otherwise. About
the Company ----------------- Decoma designs, engineers and
manufactures automotive exterior components and systems which
include fascias (bumpers), front and rear end modules, plastic body
panels, roof modules, exterior trim components, sealing and
greenhouse systems and lighting components for cars and light
trucks (including sport utility vehicles and mini-vans). Decoma has
approximately 15,000 employees in 49 manufacturing, engineering and
product development facilities in Canada, the United States,
Mexico, Germany, Belgium, England, France, Austria, Poland, the
Czech Republic and Japan. Conference Call ---------------
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Decoma management will hold a conference call to discuss third
quarter 2003 results on Wednesday, November 5, 2003 at 9:30 a.m.
EST. The dial-in numbers for the conference call are (416) 640-4127
(local) or 1 (800) 814-4853 for out of town callers, with call-in
required 10 minutes prior to the start of the conference call. The
conference call will be recorded and copies of the recording will
be made available by request. The conference call will also be
available by live webcast at http://www.newswire.ca/webcast and
will be available for a period of 90 days.
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Contact Information -------------------- For further information
about Decoma, please visit the Company's website at
http://www.decoma.com/. Readers are asked to refer to the MD&A
attached to this release for a more detailed discussion of the
third quarter 2003 results. DECOMA INTERNATIONAL INC. Consolidated
Balance Sheets (Unaudited)
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As at As at September 30, December 31, (U.S. dollars in thousands)
2003 2002
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ASSETS
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Current assets: Cash and cash equivalents $ 61,663 $ 82,059
Accounts receivable 441,359 306,870 Inventories 195,115 160,091
Income taxes receivable 7,073 - Prepaid expenses and other 18,851
15,902
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724,061 564,922
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Investments 19,974 17,382
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Fixed assets, net 626,987 525,463
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Goodwill, net (note 7) 68,056 62,008
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Future tax assets 11,117 6,015
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Other assets 16,505 16,745
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$ 1,466,700 $ 1,192,535
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities: Bank indebtedness (note 8(b)) $ 80,242 $
55,021 Accounts payable 220,669 187,656 Accrued salaries and wages
67,551 59,715 Other accrued liabilities 81,911 54,104 Income taxes
payable - 13,336 Long-term debt due within one year 4,477 6,918
Debt due to Magna and related parties within one year (note 8(c))
115,944 103,536 Convertible Series Preferred Shares, held by Magna
(note 8(a)) 73,027 95,639
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643,821 575,925
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Long-term debt 6,474 9,677
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Long-term debt due to Magna and related parties (note 8(c)) 82,628
75,094
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Convertible Series Preferred Shares, held by Magna (note 8(a))
68,407 116,140
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Other long-term liabilities 6,831 4,837
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Future tax liabilities 50,989 48,114
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Shareholders' equity: Debentures (note 9) 67,845 - Convertible
Series Preferred Shares (note 10) 10,776 18,765 Class A Subordinate
Voting Shares (note 10) 287,137 172,488 Class B Shares (note 10)
30,594 30,594 Retained earnings 167,949 111,450 Currency
translation adjustment 43,249 29,451
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607,550 362,748
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$ 1,466,700 $ 1,192,535
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See accompanying notes
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DECOMA INTERNATIONAL INC. Consolidated Statements of Income and
Retained Earnings (Unaudited)
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------------------------------------------------ Three Month
Periods Nine Month Periods Ended September 30, Ended September 30,
-------------------------------------------------------------------------
(U.S. dollars, in thousands except share and per share figures)
2003 2002 2003 2002
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Sales $ 556,444 $ 465,518 $1,709,671 $1,528,485
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Cost of goods sold 457,402 371,693 1,370,209 1,213,115 Depreciation
and amortization 22,258 19,806 64,321 58,438 Selling, general and
administrative (note 5) 42,215 32,541 124,046 98,066 Affiliation
and social fees 5,663 5,366 18,337 19,573 Other charge (note 7) - -
- 8,301
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Operating income 28,906 36,112 132,758 130,992 Equity (income) loss
(406) 305 (1,428) (474) Interest expense, net 2,551 3,065 7,828
9,474 Amortization of discount on Convertible Series Preferred
Shares 2,316 2,028 6,617 6,413 Other income (note 6) - - (1,387)
(3,874)
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Income before income taxes 24,445 30,714 121,128 119,453 Income
taxes 9,686 12,092 45,249 49,523
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Net income $ 14,759 $ 18,622 $ 75,879 $ 69,930
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Financing charges on Convertible Series Preferred Shares and
Debentures, net of taxes (note 9) $ (2,459) $ (1,137) $ (6,410) $
(3,495)
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Net income attributable to Class A Subordinate Voting and Class B
Shares 12,300 17,485 69,469 66,435 Retained earnings, beginning of
period 160,451 79,654 111,450 49,768 Dividends on Class A
Subordinate Voting and Class B Shares (4,802) (3,403) (12,970)
(10,163) Adjustment for change in accounting policy for goodwill
(note 7) - - - (12,304)
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Retained earnings, end of period $ 167,949 $ 93,736 $ 167,949 $
93,736
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Earnings per Class A Subordinate Voting or Class B Share Basic $
0.17 $ 0.26 $ 1.00 $ 0.98 Diluted $ 0.16 $ 0.21 $ 0.80 $ 0.78
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Average number of Class A Subordinate Voting and Class B Shares
outstanding (in millions) Basic 73.2 67.9 69.8 67.7 Diluted 106.4
98.4 103.5 98.3
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See accompanying notes
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DECOMA INTERNATIONAL INC. Consolidated Statements of Cash Flows
(unaudited)
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Three Month Periods Nine Month Periods Ended September 30, Ended
September 30,
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(U.S. dollars, in thousands 2003 2002 2003 2002
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Cash provided from (used for): OPERATING ACTIVITIES Net income $
14,759 $ 18,622 $ 75,879 $ 69,930 Items not involving current cash
flows 22,704 22,862 63,918 73,981
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37,463 41,484 139,797 143,911 Changes in non-cash working capital
(33,106) (7,186) (95,212) 3,541
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4,357 34,298 44,585 147,452
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INVESTING ACTIVITIES Fixed asset additions (48,435) (18,762)
(118,678) (50,376) Increase in investments and other assets (757)
(1,770) (2,082) (4,196) Business acquisitions (note 13) (4,984) -
(13,260) (2,584) Proceeds from disposition of fixed and other
assets 123 173 457 225 Proceeds from disposition of operating
division, net (note 6(b)) - 340 - 5,736
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(54,053) (20,019) (133,563) (51,195)
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FINANCING ACTIVITIES Increase (decrease) in bank indebtedness
67,313 15,251 19,323 (75,372) Repayments of long term debt (3,327)
(361) (4,159) (10,483) Repayments of debt due to Magna and related
parties (26) - (77) (7,836) Issuance of Debentures (note 9) - -
66,128 - Debentures interest payments - - (1,252) - Issuances of
Class A Subordinate Voting Shares (note 10) - 4,554 4,715 4,663
Dividends on Convertible Series Preferred Shares (3,403) (3,031)
(9,986) (9,076) Dividends on Class A Subordinate Voting and Class B
Shares (4,802) (3,403) (12,970) (10,163)
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55,755 13,010 61,722 (108,267)
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Effect of exchange rate changes on cash and cash equivalents 430
(832) 6,860 1,736
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Net increase (decrease) in cash and cash equivalents during the
period 6,489 26,457 (20,396) (10,274) Cash and cash equivalents,
beginning of period 55,174 57,540 82,059 94,271
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Cash and cash equivalents, end of period $ 61,663 $ 83,997 $ 61,663
$ 83,997
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See accompanying notes
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DECOMA INTERNATIONAL INC. Notes to Consolidated Financial
Statements (Unaudited)
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1. The Company Decoma International Inc. ("Decoma" or the
"Company") is a full service supplier of exterior vehicle
appearance systems for the world's automotive industry. Decoma
designs, engineers and manufactures automotive exterior components
and systems which include fascias (bumpers), front and rear end
modules, plastic body panels, roof modules, exterior trim
components, sealing and greenhouse systems and lighting components
for cars and light trucks (including sport utility vehicles and
mini vans). 2. Basis of Presentation The unaudited interim
consolidated financial statements of Decoma have been prepared in
U.S. dollars in accordance with Canadian generally accepted
accounting principles ("GAAP"), except that certain disclosures
required for annual financial statements have not been included.
Accordingly, the unaudited interim consolidated financial
statements should be read in conjunction with the Company's audited
consolidated financial statements for the year ended December 31,
2002 (the Company's "annual financial statements") which were
included in the Company's annual report to shareholders for the
year then ended. The unaudited interim consolidated financial
statements have been prepared on a basis that is consistent with
the accounting policies set out in the Company's annual financial
statements. In the opinion of management, the unaudited interim
consolidated financial statements reflect all adjustments, which
consist only of normal and recurring items, necessary to present
fairly the financial position of the Company as at September 30,
2003 and the results of its operations and cash flows for the three
and nine month periods ended September 30, 2003 and 2002. 3.
Cyclicality of Operations Substantially all revenue is derived from
sales to the North American and European facilities of the major
automobile manufacturers. The Company's operations are exposed to
the cyclicality inherent in the automotive industry and to changes
in the economic and competitive environments in which the Company
operates. The Company is dependent on continued relationships with
the major automobile manufacturers. 4. Use of Estimates The
preparation of the unaudited interim consolidated financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the
unaudited interim consolidated financial statements and
accompanying notes. Management believes that the estimates utilized
in preparing its unaudited interim consolidated financial
statements are reasonable and prudent; however, actual results
could differ from these estimates. 5. Foreign Exchange Selling,
general and administrative expenses ("SG&A") are net of
earnings (losses) resulting from foreign exchange of:
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Three Month Periods Nine Month Periods Ended September 30, Ended
September 30,
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(U.S. dollars, in thousands 2003 2002 2003 2002
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Foreign exchange (loss) income $ (1,351) $ (106) $ (6,251) $ 19
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6. Other Income (a) During the first quarter of 2003, the Company
permanently repatriated $75 million from its United States
operations. This repatriation gave rise to the recognition of a pro
rata amount of the Company's cumulative translation adjustment
account. This amount, totalling $1.4 million, has been included in
other income and is not subject to tax. (b) During the first
quarter of 2002, the Company completed the divestiture of one of
its non-core North American divisions. The division was engaged in
the coating of automotive parts. The Company recorded other income
of $3.9 million related to this transaction, representing the
excess of sale proceeds over the carrying value of the fixed and
working capital assets of this division and direct costs related to
the transaction. Income taxes includes an expense of $1.0 million
related to this transaction. 7. Goodwill and Deferred Preproduction
Expenditures In 2002, the Company adopted the new accounting
recommendations of The Canadian Institute of Chartered Accountants
for goodwill and other intangible assets. Upon initial adoption of
these recommendations, the Company recorded a goodwill write-down
of $12.3 million related to its United Kingdom reporting unit. This
write-down was charged against January 1, 2002 opening retained
earnings. As part of its assessment of goodwill impairment, the
Company also reviewed the recoverability of deferred preproduction
expenditures at its Merplas United Kingdom facility. As a result of
this review, $8.3 million of deferred preproduction expenditures
were written off as a charge against income in the second quarter
of 2002. Refer to note 2 to the Company's annual financial
statements for further information. 8. Debt (a) Convertible Series
Preferred Shares During the third quarter of 2003, the Series 1, 2
and 3 Convertible Series Preferred Shares held by Magna
International Inc. ("Magna") were converted into Class A
Subordinate Voting Shares at a fixed conversion price of Cdn$10.07
per Class A Subordinate Voting Share. Decoma issued 14,895,729
Class A Subordinate Voting Shares on conversion. The liability
amounts for the Series 4 Convertible Series Preferred Shares are
presented as current liabilities. The Series 4 Convertible Series
Preferred Shares are retractable by Magna at their aggregate face
value of Cdn$100 million after December 31, 2003. These shares are
also convertible by Magna into the Company's Class A Subordinate
Voting Shares at a fixed conversion price of Cdn$13.20 per share.
The liability amounts for the Series 5 Convertible Series Preferred
Shares are presented as long-term liabilities as these are not
retractable by Magna until December 31, 2004. These shares are also
convertible by Magna into the Company's Class A Subordinate Voting
Shares at a fixed conversion price of Cdn$13.20 per share. The
Series 4 and 5 Convertible Series Preferred Shares are redeemable
by the Company commencing December 31, 2005. (b) Credit Facility At
September 30, 2003 the Company had lines of credit totaling $325.7
million. Of this amount, $300 million is represented by an
extendible, revolving credit facility that expires on May 27, 2004,
at which time the Company may request, subject to lender approval,
further revolving 364-day extensions. The unused and available
lines of credit at September 30, 2003 were approximately $234.8
million. (c) Debt Due to Magna and Related Parties The Company's
debt due to Magna and related parties consists of the following:
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September 30, December 31, (U.S. dollars in thousands) 2003 2002
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Debt denominated in Canadian dollars(i) $ 44,293 $ 38,256 Debt
denominated in Euros(ii) 153,199 139,324 Lease obligation
denominated in Euros 1,080 1,050
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198,572 178,630 Less due within one year 115,944 103,536
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$ 82,628 $ 75,094
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Notes: (i) The debt denominated in Canadian dollars arose on
closing of the Global Exteriors Transaction. This debt initially
bore interest at 7.5% and was repayable in 2001. In addition to the
maturity date, the interest rate on this debt was subsequently
renegotiated to 4.85% effective September 4, 2001, 3.10% effective
January 1, 2002, 3.60% effective April 1, 2002, 3.83% effective
July 1, 2002, 3.90% effective October 1, 2002, 3.85% effective
January 1, 2003, 4.25% effective April 1, 2003, 4.19% effective
July 1, 2003 and 3.86% effective October 1, 2003. The maturity date
of this Cdn$60 million debt has been extended to December 31, 2003.
(ii) The debt denominated in Euros arose on closing of the Global
Exteriors Transaction. The debt initially bore interest at 7.0% to
7.5% and was repayable over the period to December 31, 2004 with
the first tranche of the principal due October 1, 2002. In addition
to the maturity date, the interest rate on the first tranche of the
principal was renegotiated to 4.29% effective October 2, 2002,
3.86% effective January 2, 2003, 3.51% effective April 2, 2003,
3.14% effective July 2, 2003 and 3.32% effective October 2, 2003.
Of the debt outstanding at September 30, 2003, $70.6 million is due
January 1, 2004 and $82.6 million is due December 31, 2004. 9.
Debentures On March 27, 2003, the Company issued Cdn$100 million of
6.5% convertible unsecured subordinated debentures (the
"Debentures") maturing March 31, 2010. The Debentures are
convertible at the option of the holder at any time into the
Company's Class A Subordinate Voting Shares at a fixed conversion
price of Cdn$13.25 per share. All or part of the Debentures are
redeemable at the Company's option between March 31, 2007 and March
31, 2008 if the weighted average trading price of the Company's
Class A Subordinate Voting Shares is not less than Cdn$16.5625 for
the 20 consecutive trading days ending five trading days preceding
the date on which notice of redemption is given. Subsequent to
March 31, 2008, all or part of the Debentures are redeemable at the
Company's option at any time. On redemption or maturity, the
Company will have the option of retiring the Debentures with Class
A Subordinate Voting Shares in which case the number of Class A
Subordinate Voting Shares issuable is based on 95% of the trading
price of the Company's Class A Subordinate Voting Shares for the 20
consecutive trading days ending five trading days prior to the date
fixed for redemption or maturity. In addition, the Company may
elect from time to time to issue and deliver freely tradeable Class
A Subordinate Voting Shares to a trustee in order to raise funds to
satisfy the obligation to pay interest on the Debentures. Under
Canadian GAAP, the key attributes of the Debentures are separately
valued and accounted for as follows: - the present value of
principal and interest (each of which can, at the option of the
Company, be settled with the issuance of Class A Subordinate Voting
Shares) has been presented as equity. The present value was
determined using a discount rate of 7.75% reflecting an estimate of
the coupon rate that the Debentures would have borne absent the
holders' conversion feature. The resulting discount is accreted to
the Debentures' face value over the period from issuance to
unrestricted redemption (March 31, 2008) through periodic charges,
net of income taxes, to retained earnings; and - the holders'
conversion feature is similar to a stock warrant as it provides the
holder with the option to exchange their Debentures for Class A
Subordinate Voting Shares at a fixed price. The residual approach
was used to value this attribute and this amount is also presented
as equity. In addition to the impact on diluted earnings per share
of the Company's Convertible Series Preferred Shares and issued and
outstanding stock options, diluted earnings per share have been
calculated based on the weighted average number of Class A
Subordinate Voting and Class B Shares that would have been
outstanding during the period had the holders of the Debentures
exercised their fixed price conversion rights at the date of
issuance of the Debentures. 10. Capital Stock Class and Series of
Outstanding Securities For details concerning the nature of the
Company's securities, please refer to note 11, "Convertible Series
Preferred Shares", and note 12, "Capital Stock", of the Company's
annual financial statements. The following table summarizes the
outstanding share capital of the Company:
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Authorized Issued
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Convertible Series Preferred Shares (Convertible into Class A
Subordinate Voting Shares) 3,500,000 2,000,000 Preferred Shares,
issuable in series Unlimited - Class A Subordinate Voting Shares
Unlimited 51,598,628 Class B Shares (Convertible into Class A
Subordinate Voting Shares) Unlimited 31,909,091
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During the second quarter of 2003, the Company issued 548,600 Class
A Subordinate Voting Shares to the Decoma employee deferred profit
sharing plan. During the third quarter of 2003, the Company issued
14,895,729 Class A Subordinate Voting Shares on conversion of the
Series 1, 2 and 3 Convertible Series Preferred Shares (see note
8(a)). Incentive Stock Options Information concerning the Company's
Incentive Stock Option Plan is included in note 12, "Capital
Stock", of the Company's annual financial statements. The following
is a continuity schedule of options outstanding:
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Weighted Average Number of Exercise Options Number Price
Exercisable
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Outstanding at December 31, 2002 2,195,000 Cdn$ 13.13 1,444,000
Granted 455,000 Cdn$ 12.43 Cancelled (10,000) Cdn$ 10.30 (4,000)
Vested 277,000
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Outstanding at September 30, 2003 2,640,000 Cdn$ 13.02 1,717,000
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The maximum number of shares reserved to be issued for stock
options is 4,100,000 Class A Subordinate Voting Shares. The number
of reserved but unoptioned shares at September 30, 2003 is
1,408,750. The total number of shares issued from exercised stock
options, from the inception date of the plan, is 51,250. The fair
value of stock options is estimated at the grant date using the
Black-Scholes option pricing model using the following weighted
average assumptions for stock options issued in each period
indicated (no stock options were issued during the three month
periods ended September 30, 2003 and 2002):
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Nine Month Periods Ended September 30,
---------------------------------------------------------------------
(U.S. dollars in thousands) 2003 2002
---------------------------------------------------------------------
Risk free interest rate 3.0% 2.7% Expected dividend yield 3.2% 1.9%
Expected volatility 39% 37% Expected life of options (years) 5 5
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The Black-Scholes option valuation model, as well as other
currently accepted option valuation models, was developed for use
in estimating the fair value of freely tradable options which are
fully transferable and have no vesting restrictions. In addition,
this model requires the input of highly subjective assumptions,
including future stock price volatility and expected time until
exercise. Because the Company's outstanding options have
characteristics which are significantly different from those of
traded options, and because changes in any of the assumptions can
materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options. However, for
purposes of pro forma disclosures, the Company's net income
attributable to Class A Subordinate Voting and Class B Shares,
based on the fair value of all stock options at the grant date,
would have been:
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Three Month Periods Nine Month Periods Ended September 30, Ended
September 30,
---------------------------------------------------------------------
(U.S. dollars, in thousands except per share figures) 2003 2002
2003 2002
---------------------------------------------------------------------
Net income attributable to Class A Subordinate Voting and Class B
Shares $ 12,300 $ 17,485 $ 69,469 $ 66,435 Pro forma adjustments
for the fair value of stock option grants (316) (218) (868) (816)
---------------------------------------------------------------------
Pro forma net income attributable to Class A Subordinate Voting and
Class B Shares $ 11,984 $ 17,267 $ 68,601 $ 65,619
---------------------------------------------------------------------
---------------------------------------------------------------------
Pro forma earnings per Class A Subordinate Voting or Class B Share
Basic $ 0.16 $ 0.25 $ 0.98 $ 0.97 Diluted $ 0.16 $ 0.21 $ 0.79 $
0.77
---------------------------------------------------------------------
---------------------------------------------------------------------
Maximum Shares The following table presents the maximum number of
shares that would be outstanding if all of the outstanding options,
Convertible Series Preferred Shares and Debentures issued and
outstanding as at September 30, 2003 were exercised or converted:
---------------------------------------------------------------------
Number of Shares
---------------------------------------------------------------------
Class A Subordinate Voting Shares outstanding at September 30, 2003
51,598,628 Class B Shares outstanding at September 30, 2003
31,909,091 Options to purchase Class A Subordinate Voting Shares
2,640,000 Debentures, convertible by the holders at Cdn$13.25 per
share 7,547,170 Convertible Series Preferred Shares, convertible at
Cdn$13.20 per share 15,151,516
---------------------------------------------------------------------
108,846,405
---------------------------------------------------------------------
---------------------------------------------------------------------
The above amounts include shares issuable if the holders of the
Debentures exercise their conversion option but exclude Class A
Subordinate Voting Shares issuable, only at the Company's option,
to settle interest and principal related to the Debentures. The
number of Class A Subordinate Voting Shares issuable at the
Company's option is dependent on the trading price of Class A
Subordinate Voting Shares at the time the Company elects to settle
Debenture interest and principal with shares. 11. Contingencies In
the ordinary course of business activities, the Company may be
contingently liable for litigation and claims with customers,
suppliers and former employees and for environmental remediation
costs. Management believes that adequate provisions have been
recorded in the accounts where required. Although it is not
possible to estimate the extent of potential costs and losses, if
any, management believes, but can provide no assurance, that the
ultimate resolution of such contingencies would not have a material
adverse effect on the financial position and results of operations
of the Company. 12. Segmented Information The Company operates in
one industry segment, the automotive exteriors business. As at
September 30, 2003, the Company had 27 manufacturing facilities in
North America and 14 in Europe. In addition, the Company had 8
product development and engineering centres. The Company's European
divisions are managed separately from the Company's North American
divisions as a result of differences in customer mix and business
environment. The Company's internal financial reports, which are
reviewed by executive management including the Company's President
and Chief Executive Officer, segment divisional results between
North America and Europe. This segmentation recognizes the
different geographic business risks faced by the Company's North
American and European divisions, including vehicle production
volumes in North America and Europe, foreign currency exposure,
differences in OEM customer mix, the level of customer outsourcing
and the nature of products and systems outsourced. The accounting
policies of each segment are consistent with those used in the
preparation of the unaudited interim consolidated financial
statements. Inter-segment sales and transfers are accounted for at
fair market value. The following tables show certain information
with respect to segment disclosures.
---------------------------------------------------------------------
Three Month Period Ended September 30, 2003
---------------------------------------------------------------------
(U.S. dollars in North thousands) America Europe Corporate Total
---------------------------------------------------------------------
Sales $ 373,358 $ 183,738 $ - $ 557,096 Inter-segment sales (136)
(516) - (652)
---------------------------------------------------------------------
Sales to external customers $ 373,222 $ 183,222 $ - $ 556,444
---------------------------------------------------------------------
Depreciation and amortization $ 15,776 $ 6,482 $ - $ 22,258
---------------------------------------------------------------------
Operating income (loss) $ 42,923 $ (9,017) $ (5,000) $ 28,906
---------------------------------------------------------------------
Equity income $ (406) $ - $ - $ (406)
---------------------------------------------------------------------
Interest expense (income), net $ 7,762 $ 4,557 $ (9,768) $ 2,551
---------------------------------------------------------------------
Amortization of discount on Convertible Series Preferred Shares $ -
$ - $ 2,316 $ 2,316
---------------------------------------------------------------------
Fixed assets, net $ 423,966 $ 203,021 $ - $ 626,987
---------------------------------------------------------------------
Fixed asset additions $ 29,599 $ 18,876 $ - $ 48,435
---------------------------------------------------------------------
Goodwill, net $ 48,711 $ 19,345 $ - $ 68,056
---------------------------------------------------------------------
---------------------------------------------------------------------
Three Month Period Ended September 30, 2002
---------------------------------------------------------------------
(U.S. dollars in North thousands) America Europe Corporate Total
---------------------------------------------------------------------
Sales $ 331,098 $ 135,227 $ - $ 466,325 Inter-segment sales (205)
(602) - (807)
---------------------------------------------------------------------
Sales to external customers $ 330,893 $ 134,625 $ - $ 465,518
---------------------------------------------------------------------
Depreciation and amortization $ 14,036 $ 5,770 $ - $ 19,806
---------------------------------------------------------------------
Operating income (loss) $ 42,133 $ (3,656) $ (2,365) $ 36,112
---------------------------------------------------------------------
Equity loss $ 305 $ - $ - $ 305
---------------------------------------------------------------------
Interest expense (income), net $ 8,930 $ 4,972 $ (10,837) $ 3,065
---------------------------------------------------------------------
Amortization of discount on Convertible Series Preferred Shares $ -
$ - $ 2,028 $ 2,028
---------------------------------------------------------------------
Fixed assets, net $ 351,067 $ 138,248 $ - $ 489,315
---------------------------------------------------------------------
Fixed asset additions $ 9,596 $ 9,166 $ - $ 18,762
---------------------------------------------------------------------
Goodwill, net $ 44,579 $ 16,508 $ - $ 61,087
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine Month Period Ended September 30, 2003
---------------------------------------------------------------------
(U.S. dollars in North thousands) America Europe Corporate Total
---------------------------------------------------------------------
Sales $1,180,502 $ 531,528 $ - $1,712,030 Inter-segment sales (527)
(1,832) - (2,359)
---------------------------------------------------------------------
Sales to external customers $1,179,975 $ 529,696 $ - $1,709,671
---------------------------------------------------------------------
Depreciation and amortization $ 45,165 $ 19,156 $ - $ 64,321
---------------------------------------------------------------------
Operating income (loss) $ 159,469 $ (11,908) $ (14,803) $ 132,758
---------------------------------------------------------------------
Equity income $ (1,428) $ - $ - $ (1,428)
---------------------------------------------------------------------
Interest expense (income), net $ 20,913 $ 13,382 $ (26,467) $ 7,828
---------------------------------------------------------------------
Amortization of discount on Convertible Series Preferred Shares $ -
$ - $ 6,617 $ 6,617
---------------------------------------------------------------------
Other income (note 6(a)) $ - $ - $ 1,387 $ 1,387
---------------------------------------------------------------------
Fixed assets, net $ 423,966 $ 203,021 $ - $ 626,987
---------------------------------------------------------------------
Fixed asset additions $ 77,523 $ 41,155 $ - $ 118,678
---------------------------------------------------------------------
Goodwill, net $ 48,711 $ 19,345 $ - $ 68,056
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine Month Period Ended September 30, 2002
---------------------------------------------------------------------
(U.S. dollars in North thousands) America Europe Corporate Total
---------------------------------------------------------------------
Sales $1,118,755 $ 411,649 $ - $1,530,404 Inter-segment sales
(1,280) (639) - (1,919)
---------------------------------------------------------------------
Sales to external customers $1,117,475 $ 411,010 $ - $1,528,485
---------------------------------------------------------------------
Depreciation and amortization $ 41,009 $ 17,429 $ - $ 58,438
---------------------------------------------------------------------
Other charge (note 7) $ - $ 8,301 $ - $ 8,301
---------------------------------------------------------------------
Operating income (loss) $ 148,779 $ (12,240) $ (5,547) $ 130,992
---------------------------------------------------------------------
Equity income $ (474) $ - $ - $ (474)
---------------------------------------------------------------------
Interest expense (income), net $ 18,261 $ 15,365 $ (24,152) $ 9,474
---------------------------------------------------------------------
Amortization of discount on Convertible Series Preferred Shares $ -
$ - $ 6,413 $ 6,413
---------------------------------------------------------------------
Other income (note 6(b)) $ (3,874) $ - $ - $ (3,874)
---------------------------------------------------------------------
Fixed assets, net $ 351,067 $ 138,248 $ - $ 489,315
---------------------------------------------------------------------
Fixed asset additions $ 30,677 $ 19,699 $ - $ 50,376
---------------------------------------------------------------------
Goodwill, net $ 44,579 $ 16,508 $ - $ 61,087
---------------------------------------------------------------------
13. Business Acquisitions (a) During the second quarter of 2003,
the Company entered into an agreement to acquire Federal Mogul's
original equipment automotive lighting operations in Matamoros,
Mexico, a distribution centre in Brownsville, Texas, an assembly
operation in Toledo, Ohio and certain of the engineering
operations, contracts and equipment at Federal Mogul's original
equipment automotive lighting operations in Hampton, Virginia. The
total purchase price was $2.25 million for fixed assets plus an
amount for inventory based on the final determination of the value
of inventory on hand plus transaction costs. The transaction closed
on April 14, 2003 with a transition of the Hampton, Virginia
contracts and assets over the balance of 2003. As at September 30,
2003, the transaction was substantially complete with a total
purchase price of $10.4 million representing $10.25 million
(including $8.0 million for inventory) paid to Federal Mogul plus
transaction costs. (b) During both the second quarter of 2002 and
the second quarter of 2003, the Company repaid two promissory notes
that were due May 31, 2002 and May 31, 2003, respectively, each in
the amount of Cdn$4 million that arose on the May 2001 acquisition
of the remaining minority interest in Decomex Inc. Refer to note 3
to the Company's annual financial statements for further
information regarding this acquisition. DECOMA INTERNATIONAL INC.
Management's Discussion and Analysis of Results of Operations and
Financial Position Three and nine month periods ended September 30,
2003 and 2002
-------------------------------------------------------------------------
All amounts in this Management's Discussion and Analysis of Results
of Operations and Financial Position ("MD&A") are in U.S.
dollars unless otherwise noted. This MD&A should be read in
conjunction with the Company's unaudited interim consolidated
financial statements for the three and nine month periods ended
September 30, 2003, included elsewhere herein, and the Company's
consolidated financial statements and MD&A for the year ended
December 31, 2002, included in the Company's Annual Report to
Shareholders for 2002. Impact of Translation of Foreign Currency
Results of Operations into the Company's U.S. Dollar Reporting
Currency
-------------------------------------------------------------------------
Three Month Nine Month Periods Ended Periods Ended September 30,
September 30, ----------------- ----------------- % % 2003 2002
Change 2003 2002 Change
-------------------------------------------------------------------------
1 Cdn dollar equals U.S. dollars 0.725 0.640 13.3% 0.701 0.637
10.0% 1 Euro equals U.S. dollars 1.124 0.984 14.2% 1.112 0.927
20.0% 1 British Pound equals U.S. dollars 1.609 1.549 3.9% 1.611
1.479 8.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The preceding table reflects the average foreign exchange rates
between the primary currencies in which the Company conducts
business and its U.S. dollar reporting currency. Significant
changes in the exchange rates of these currencies against the U.S.
dollar impact the reported U.S. dollar amounts of the Company's
results of operations. The results of foreign operations are
translated into U.S. dollars using the average exchange rates in
the table above for the relevant period. Throughout this MD&A
reference is made to the impact of translation of foreign
operations on reported U.S. dollar amounts where significant. In
addition to the impact of movements in exchange rates on
translation of foreign operations into U.S. dollars, the Company's
results can also be influenced by the impact of movements in
exchange rates on foreign currency transactions (such as raw
material purchases denominated in foreign currencies). However, as
a result of historical hedging programs employed by the Company,
current period results have not been significantly impacted by
foreign currency transactions and the recent movements in exchange
rates. The Company records foreign currency transactions at the
hedged rate. Finally, holding gains and losses on foreign currency
denominated monetary items, which are recorded in selling, general
and administrative expenses, impact reported results. This MD&A
makes reference to the impact of these amounts where significant.
OVERVIEW Total sales grew to $556.4 million in the third quarter of
2003. Total sales benefited $41.8 million from translation.
Excluding the impact of translation, total sales increased $49.1
million or 10% over the third quarter of 2002 due primarily to the
acquisition of certain of Federal Mogul's original equipment
automotive lighting operations (the "FM Lighting Acquisition") in
the second quarter of 2003, sales at recent new European facility
startups and higher tooling sales. Diluted earnings per share was
$0.16 in the third quarter of 2003 compared to $0.21 for the third
quarter of 2002. This decline is primarily attributable to an
increase in the average number of diluted Class A Subordinate
Voting and Class B Shares outstanding due to the issuance in March
2003 of Cdn$100 million of 6.5% convertible unsecured subordinated
debentures (the "Debentures") and due to a $3.9 million decline in
net income in the third quarter of 2003 compared to the third
quarter of 2002. The decline in net income was due to an increase
in European operating losses; the impact on North American
operating income of the changeover of a number of large production
programs; lower production volumes on certain high content
programs; costs associated with the Company's new mould and paint
facility currently under construction in the Southern United States
("Decostar"); customer pricing pressures; and the impact on the
corporate segment of foreign exchange losses on U.S. dollar
denominated monetary items held in Canada. RESULTS OF OPERATIONS
Three Month Periods Ended September 30, 2003 and 2002 Sales
-------------------------------------------------------------------------
Three Month Periods Ended September 30, --------------------------
% 2003 2002 Change
-------------------------------------------------------------------------
Light Vehicle Production Volumes (in millions) North America 3.7
3.8 (3%) Western Europe 3.6 3.6 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Content Per Vehicle (U.S. dollars) North America $94 $81
16% Europe 42 34 24%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Production Sales (U.S. dollars in millions) North America $343.5
$312.7 10% Europe Excluding Merplas 145.6 114.7 27% Merplas 6.4 8.7
(26%) ------ ------ Total Europe 152.0 123.4 23% Global Tooling and
Other Sales 60.9 29.4 107%
-------------------------------------------------------------------------
Total Sales $556.4 $465.5 20%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average content per vehicle in North America and in Europe has been
calculated by dividing the Company's North American and European
production sales by the industry's North American and European
light vehicle production volumes, respectively. Excluding the
effects of translation, continued growth in average content per
vehicle provides a measure of the Company's ability to sell its
products onto new vehicle platforms and/or expand its sales onto
existing vehicle platforms. Increases in average content per
vehicle may result from any one or more of: the award of takeover
business; the acquisition of competitors; the expansion of the
Company's existing product markets (i.e. the conversion of bumpers
from steel to plastic); and the introduction of new products. North
America North American production sales grew by 10% to $343.5
million in the third quarter of 2003. A 3% decline in North
American vehicle production volumes negatively impacted sales by
$16.1 million. However, this decline was offset by significant
growth in North American content per vehicle. North American
content per vehicle grew $13 or 16% to approximately $94 for the
third quarter of 2003. Translation of Canadian dollar sales into
the Company's U.S. dollar reporting currency added approximately
$25.2 million to production sales and $7 to North American content
per vehicle. In addition, the FM Lighting Acquisition added
approximately $16.5 million to production sales and $5 to North
American content per vehicle. The remaining net $5.2 million
increase in production sales and $1 increase in North American
content per vehicle was due to: - new takeover business including
certain General Motors lighting and Ford running board programs; -
sales on programs that launched during or subsequent to the third
quarter of 2002 including the General Motors GMX 367 (Grand Prix)
and the GMX 380 (Malibu) programs, the DaimlerChrysler AN (Dakota)
program serviced by a new Michigan based specialty vehicle assembly
facility launched by the Company in the fourth quarter of 2002, the
Ford U231 (Aviator) program and the BMW E85 (Z4) program amongst
others; and - strong volumes on other high content production
programs including the General Motors GMX 210 (Impala), GMX 320
(Cadillac CTS) and GMT 820 C and D (Cadillac Escalade and Denali
SUV) programs. These increases were partially offset by: - end of
production on the DaimlerChrysler LH (Concorde, Intrepid and 300M)
program during the current quarter (the new Daimler Chrysler LX
program does not launch until the first quarter of 2004); - lower
production volumes as a result of the changeover of the Ford WIN
126 (Windstar) program to the V229 (Freestar) program during the
current quarter; - end of production on the General Motors MS2000
(Grand Prix) program; - lower production volumes on certain other
long running high content programs including the Ford U152
(Explorer) and EN114 (Crown Victoria, Grand Marquis) programs and
the DaimlerChrysler JR (Stratus, Sebring and Sebring Convertible),
RS (Minivan) and PT Cruiser programs; - reduced painting content on
the GMT 805 (Avalanche) and GMT 806 (Escalade EXT) programs in
Mexico; - reduced content on the DaimlerChrysler RS (Minivan)
program; and - the closure of the Company's specialty vehicle
operation in Montreal due to the end of production of the F Car
(Camaro, Firebird) at General Motors' St. Therese assembly plant in
the third quarter of 2002. Europe European production sales
increased 23% to $152.0 million in the third quarter of 2003 on
level production volumes. European content per vehicle grew $8 or
24% to approximately $42 for the third quarter of 2003. Content
growth was driven by the translation of Euro and British Pound
sales into the Company's U.S. dollar reporting currency. This added
approximately $14.3 million to European production sales and $4 to
European content per vehicle. Content growth was also driven by
sales at recent new facility startups in the latter part of 2002
and the first half of 2003 including the launch of the VW Group T5
(Transit Van) fascia production and front end module assembly and
sequencing contract at the Company's new Modultec and Formatex
facilities in Germany and Poland; the launch of the DaimlerChrysler
Mercedes E Class 4 Matic front end module assembly and sequencing
contract at the Company's new Graz, Austria facility; and other VW
front end module assembly and sequencing contracts as a result of
the takeover of an assembly and sequencing facility in Belgium (the
Brussels Sequencing Centre) during the second quarter of 2003.
These new facilities collectively added approximately $26.8 million
to production sales and $7 to European content per vehicle. The
remaining net $12.5 million reduction in production sales and $3
reduction in content per vehicle is due to a number of factors
including a decline in production volumes on the Jaguar X400
program produced at Merplas. Merplas' sales declined from $8.7
million in the third quarter of 2002 to $6.4 million in the third
quarter of 2003. Adjusting to eliminate the impact of translation
of British Pound sales into U.S. dollars, Merplas' sales declined
$2.6 million negatively impacting European content per vehicle by
$1. In addition, European content was negatively impacted by lower
volumes on certain long running high content programs such as the
DaimlerChrysler Mercedes C Class and Ford Mondeo programs and the
completion of the Audi TT hard top program. These factors were
partially offset by the launch of various new Audi production
programs at the Company's facilities in Germany and strong volumes
on the Opel Vectra program. Global Tooling and Other Tooling and
other sales on a global basis increased 107% to $60.9 million for
the third quarter of 2003. The increase came in both North America
and Europe and is primarily related to the Ford U204 (Escape)
refresh program in North America and the VW Group A5 (Golf) program
in Europe. Gross Margin Gross margin increased to $99.0 million in
the third quarter of 2003 compared to $93.8 million in the third
quarter of 2002. As a percentage of total sales, gross margin
declined to 17.8% compared to 20.2% for the third quarters of 2003
and 2002, respectively. The decline in the gross margin percentage
is due to a substantial increase in tooling sales; a decline in
European gross margin due to continued operating inefficiencies,
costs incurred to support future European sales growth and growth
in European front end module assembly and sequencing sales and the
lower margins associated with purchased components; the changeover
of a number of large North American production programs; lower
North American production volumes including lower volumes on
certain long running high content programs; OEM price concessions;
spending at the Company's Decostar facility; and growth in the
Company's lighting business which currently operates at lower
margins. These negative impacts were partially offset by the
Company's ongoing continuous improvement programs. Depreciation and
Amortization Depreciation and amortization costs increased to $22.3
million for the third quarter of 2003 compared to $19.8 million for
the third quarter of 2002. Of this increase, $1.6 million is
attributable to the translation of Canadian dollar, Euro and
British Pound depreciation expense into the Company's U.S. dollar
reporting currency. The remaining increase is due to the Company's
ongoing capital spending program. The Company's current capital
spending program incorporates significant amounts for two
greenfield projects, being the Decostar project and a new paint
line at the Company's Belplas facility in Belgium. Depreciation
will not commence on these projects until commercial production
begins at Decostar, which is now scheduled for early 2005, and at
the new Belplas paint line in the fourth quarter of 2003. Selling,
General and Administrative ("S,G&A") S,G&A costs were $42.2
million for the third quarter of 2003, up from $32.5 million for
the third quarter of 2002. This increase reflects the translation
of Canadian dollar, Euro and British Pound S,G&A costs into the
Company's U.S. dollar reporting currency which increased reported
S,G&A dollars by $3.2 million. In addition, foreign exchange
losses increased by $1.2 million in the third quarter of 2003
largely on U.S. dollar denominated monetary items held within the
Company's Canadian operations. The remainder of the increase in
S,G&A expense is related to the Company's Decostar and Belplas
projects; the FM Lighting Acquisition; severance costs; and
additional S,G&A expense at recently launched facilities
including Modultec, Formatex, Graz and the Brussels Sequencing
Centre in Europe and a new specialty vehicle facility in Michigan.
As a percentage of sales, S,G&A increased to 7.6% for the third
quarter of 2003 compared to 7.0% for the third quarter of 2002. In
addition to the benefits provided by Magna to Decoma under the
affiliation agreement noted below, Magna provides certain
management and administrative services to the Company, including
specialized legal, environmental, immigration, tax, internal audit,
treasury, information systems and employee relations services, in
return for a specific amount negotiated between the Company and
Magna. The Company is currently in discussions with Magna with
respect to a formal agreement detailing these arrangements. The
cost of management and administrative services provided by Magna
and included in S,G&A was $1.1 million for the third quarter of
2003 compared to $0.8 million for the third quarter of 2002. The
increase is due to translation of Canadian dollar fees into the
Company's U.S. dollar reporting currency and to an increase in the
cost of the services provided. DATASOURCE: Decoma International
Inc. CONTACT: S. Randall Smallbone, Executive Vice President,
Finance and Chief Financial Officer of Decoma at (905) 669-2888
/FIRST AND FINAL ADD TO FOLLOW
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