DECA Denali Capital Acquisition Corporation

Decoma announces financial results for third quarter 2003 (Part 2) CONCORD, Ontario, November 5 /PRNewswire/ -- Continued from Part 1 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 recognises 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 US$373,358 US$183,738 US$ - US$557,096 Inter-segment sales (136) (516) - (652) --------------------------------------------------------------------- Sales to external customers US$373,222 US$183,222 US$ - US$556,444 --------------------------------------------------------------------- Depreciation and amortisation US$ 15,776 US$ 6,482 US$ - US$ 22,258 --------------------------------------------------------------------- Operating income (loss) US$ 42,923 US$ (9,017) US$ (5,000) US$ 28,906 --------------------------------------------------------------------- Equity income US$ (406) US$ - US$ - US$ (406) --------------------------------------------------------------------- Interest expense (income), net US$ 7,762 US$ 4,557 US$ (9,768) US$ 2,551 --------------------------------------------------------------------- Amortisation of discount on Convertible Series Preferred Shares US$ - US$ - US$ 2,316 US$ 2,316 --------------------------------------------------------------------- Fixed assets, net US$423,966 US$203,021 US$ - US$626,987 --------------------------------------------------------------------- Fixed asset additions US$ 29,599 US$ 18,876 US$ - US$ 48,435 --------------------------------------------------------------------- Goodwill, net US$ 48,711 US$ 19,345 US$ - US$ 68,056 --------------------------------------------------------------------- --------------------------------------------------------------------- Three Month Period Ended September 30, 2002 --------------------------------------------------------------------- (U.S. dollars in North thousands) America Europe Corporate Total --------------------------------------------------------------------- Sales US$331,098 US$135,227 US$ - US$466,325 Inter-segment sales (205) (602) - (807) --------------------------------------------------------------------- Sales to external customers US$330,893 US$134,625 US$ - US$465,518 --------------------------------------------------------------------- Depreciation and amortisation US$ 14,036 US$ 5,770 US$ - US$ 19,806 --------------------------------------------------------------------- Operating income (loss) US$ 42,133 US$ (3,656) US$ (2,365) US$ 36,112 --------------------------------------------------------------------- Equity loss US$ 305 US$ - US$ - US$ 305 --------------------------------------------------------------------- Interest expense (income), net US$ 8,930 US$ 4,972 US$(10,837) US$ 3,065 --------------------------------------------------------------------- Amortisation of discount on Convertible Series Preferred Shares US$ - US$ - US$ 2,028 US$ 2,028 --------------------------------------------------------------------- Fixed assets, net US$351,067 US$138,248 US$ - US$489,315 --------------------------------------------------------------------- Fixed asset additions US$ 9,596 US$ 9,166 US$ - US$ 18,762 --------------------------------------------------------------------- Goodwill, net US$ 44,579 US$ 16,508 US$ - US$ 61,087 --------------------------------------------------------------------- --------------------------------------------------------------------- Nine Month Period Ended September 30, 2003 --------------------------------------------------------------------- (U.S. dollars in North thousands) America Europe Corporate Total --------------------------------------------------------------------- Sales US$1,180,502 US$531,528 US$ - US$1,712,030 Inter-segment sales (527) (1,832) - (2,359) --------------------------------------------------------------------- Sales to external customers US$1,179,975 US$529,696 US$ - US$1,709,671 --------------------------------------------------------------------- Depreciation and amortisation US$ 45,165 US$ 19,156 US$ - US$ 64,321 --------------------------------------------------------------------- Operating income (loss) US$159,469 US$(11,908) US$(14,803)US$ 132,758 --------------------------------------------------------------------- Equity income US$ (1,428) US$ - US$ - US$ (1,428) --------------------------------------------------------------------- Interest expense (income), net US$ 20,913 US$ 13,382 US$(26,467)US$ 7,828 --------------------------------------------------------------------- Amortisation of discount on Convertible Series Preferred Shares US$ - US$ - US$ 6,617 US$ 6,617 --------------------------------------------------------------------- Other income (note 6(a)) US$ - US$ - US$ 1,387 US$ 1,387 --------------------------------------------------------------------- Fixed assets, net US$423,966 US$203,021 US$ - US$ 626,987 --------------------------------------------------------------------- Fixed asset additions US$ 77,523 US$ 41,155 US$ - US$118,678 --------------------------------------------------------------------- Goodwill, net US$ 48,711 US$ 19,345 US$ - US$ 68,056 --------------------------------------------------------------------- --------------------------------------------------------------------- Nine Month Period Ended September 30, 2002 --------------------------------------------------------------------- (U.S. dollars in North thousands) America Europe Corporate Total --------------------------------------------------------------------- Sales US$1,118,755 US$411,649 US$ - US$1,530,404 Inter-segment sales (1,280) (639) - (1,919) --------------------------------------------------------------------- Sales to external customers US$1,117,475 US$411,010 US$ - US$1,528,485 --------------------------------------------------------------------- Depreciation and amortisation US$ 41,009 US$ 17,429 US$ - US$ 58,438 --------------------------------------------------------------------- Other charge (note 7) US$ - US$ 8,301 US$ - US$ 8,301 --------------------------------------------------------------------- Operating income (loss) US$148,779 US$(12,240) US$ (5,547)US$ 130,992 --------------------------------------------------------------------- Equity income US$ (474) US$ - US$ - US$ (474) --------------------------------------------------------------------- Interest expense (income), net US$ 18,261 US$ 15,365 US$(24,152)US$ 9,474 --------------------------------------------------------------------- Amortisation of discount on Convertible Series Preferred Shares US$ - US$ - US$ 6,413 US$ 6,413 --------------------------------------------------------------------- Other income (note 6(b)) US$ (3,874) US$ - US$ - US$ (3,874) --------------------------------------------------------------------- Fixed assets, net US$351,067 US$138,248 US$ - US$ 489,315 --------------------------------------------------------------------- Fixed asset additions US$ 30,677 US$ 19,699 US$ - US$ 50,376 --------------------------------------------------------------------- Goodwill, net US$ 44,579 US$ 16,508 US$ - US$ 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 US$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 US$10.4 million representing US$10.25 million (including US$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 US$556.4 million in the third quarter of 2003. Total sales benefited US$41.8 million from translation. Excluding the impact of translation, total sales increased US$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 US$0.16 in the third quarter of 2003 compared to US$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 US$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 US$94 US$81 16% Europe 42 34 24% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Production Sales (U.S. dollars in millions) North America US$343.5 US$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 US$556.4 US$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 US$343.5 million in the third quarter of 2003. A 3% decline in North American vehicle production volumes negatively impacted sales by US$16.1 million. However, this decline was offset by significant growth in North American content per vehicle. North American content per vehicle grew US$13 or 16% to approximately US$94 for the third quarter of 2003. Translation of Canadian dollar sales into the Company's U.S. dollar reporting currency added approximately US$25.2 million to production sales and US$7 to North American content per vehicle. In addition, the FM Lighting Acquisition added approximately US$16.5 million to production sales and US$5 to North American content per vehicle. The remaining net US$5.2 million increase in production sales and US$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 US$152.0 million in the third quarter of 2003 on level production volumes. European content per vehicle grew US$8 or 24% to approximately US$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 US$14.3 million to European production sales and US$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 US$26.8 million to production sales and US$7 to European content per vehicle. The remaining net US$12.5 million reduction in production sales and US$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 US$8.7 million in the third quarter of 2002 to US$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 US$2.6 million negatively impacting European content per vehicle by US$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 US$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 US$99.0 million in the third quarter of 2003 compared to US$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 Amortisation Depreciation and amortisation costs increased to US$22.3 million for the third quarter of 2003 compared to US$19.8 million for the third quarter of 2002. Of this increase, US$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 US$42.2 million for the third quarter of 2003, up from US$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 US$3.2 million. In addition, foreign exchange losses increased by US$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 specialised 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 US$1.1 million for the third quarter of 2003 compared to US$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. Affiliation and Social Fees The Company is party to an affiliation agreement with Magna that provides for the payment by Decoma of an affiliation fee. The affiliation agreement provides the Company with, amongst other things, certain trademark rights, access to Magna's management and to its operating principles and policies, Tier 1 development assistance, global expansion assistance, vehicle system integration and modular product strategy assistance, technology development assistance and human resource management assistance. As previously disclosed, the Company entered into an amended agreement with Magna effective August 1, 2002. Affiliation fees payable under the amended agreement were reduced to 1% of Decoma's consolidated net sales (as defined in the agreement) from the 1.5% rate that previously applied. In addition, the amended agreement provides for a fee holiday on 100% of consolidated net sales derived from future business acquisitions in the calendar year of the acquisition and 50% of consolidated net sales derived from future business acquisitions in the first calendar year following the year of acquisition. The amended agreement also entitled Decoma to a credit equal to 0.25% of Decoma's consolidated net sales for the period from January 1, 2002 to July 31, 2002. In addition, Decoma was entitled to a credit equal to 1.5% of 2001 consolidated net sales derived from the acquisition of Autosystems and 50% of 1.25% of January 1, 2002 to July 31, 2002 consolidated net sales derived from Autosystems. Decoma's corporate constitution specifies that the Company will allocate a maximum of 2% of its profit before tax to support social and charitable activities. The Company pays 1.5% of its consolidated pretax profits to Magna which in turn allocates such amount to social and other charitable programs on behalf of Magna and its affiliated companies, including Decoma. Affiliation and social fee expense for the third quarter of 2003 increased to US$5.7 million from US$5.4 million for the third quarter of 2002. Affiliation fee expense in the third quarter of 2002 was 1.25%, 1.0% and 1.0% on consolidated net sales for July, August and September, respectively, less the Autosystems related fee holiday. Affiliation fees for the third quarter of 2003 were 1.0% of consolidated net sales. The increase in affiliation and social fee expenses is the result of the increase in consolidated net sales on which the affiliation fees are calculated, partially offset by a lower effective affiliation fee rate in the month of July and reduced social fee expenses due to a reduction in the pretax profits on which the social fees are calculated. Operating Income ------------------------------------------------------------------------- Three Month Periods Ended September 30, ------------------------- % (U.S. dollars in millions) 2003 2002 Change ------------------------------------------------------------------------- Operating Income North America US$42.9 US$42.1 2% Europe Excluding Merplas (6.9) (0.6) Merplas (2.1) (3.0) ------ ----- Total Europe (9.0) (3.6) Corporate (5.0) (2.4) ------------------------------------------------------------------------- Total Operating Income US$28.9 US$36.1 (20%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- As a percentage of total sales, operating income was 5.2% for the third quarter of 2003 compared to 7.8% for the third quarter of 2002. The increase in the corporate segment operating loss is substantially attributable to foreign exchange losses of US$1.3 million on U.S. dollar denominated monetary items held in Canada and to one time severance costs. North America North American operating income was substantially unchanged at US$42.9 million for the third quarter of 2003. As a percentage of total North American sales, North American operating income was 11.5% in the third quarter of 2003 compared to 12.7% in the third quarter of 2002. North American operating income was negatively impacted by: - the changeover of a number of large production programs including end of production on the DaimlerChrysler LH (Concorde, Intrepid and 300M) program (the new DaimlerChrysler LX program does not launch until the first quarter of 2004) and the changeover of the Ford WIN126 (Windstar) program to the V229 (Freestar) program; - lower North American vehicle production volumes including lower production volumes on certain long running high content programs; - OEM price concessions; - Decostar period costs totaling US$1.5 million; and - the effects of the August electricity blackout and the subsequent period of recovery. The above items were partially offset by: - contributions from sales on programs that launched during or subsequent to the third quarter of 2002; - contributions from the FM Lighting Acquisition and from new takeover business at the Company's Autosystems lighting facilities which helped to offset acquisition integration costs; - contributions from strong volumes on certain high content production programs; and - increased contributions as a result of the Company's ongoing continuous improvement programs. Europe European operating losses were US$9.0 million for the third quarter of 2003 compared to operating losses of US$3.6 million for the third quarter of 2002. European operating income continues to be negatively impacted by efficiency and other performance issues at the Company's Prometall and Decoform facilities. Operating income at these facilities declined by US$4.3 million in the third quarter of 2003 compared to the third quarter of 2002. In addition to the impact of operating inefficiencies, this decline is also the result of: - costs associated with various Audi production programs recently launched at these facilities; - costs associated with various Porsche programs that will launch in 2004 at a new assembly and sequencing facility in Zuffenhausen, Germany with fascia and related trim production currently scheduled to come from the Company's existing Decoform facility and from third parties; and - costs associated with the transfer, to a new facility located in Germany, and start-up of the Prometall operations. In addition, the Company's Decotrim exterior trim facility in Belgium continues to be impacted by competitive pricing pressures and open capacity. Decotrim's operating losses grew US$0.7 million in third quarter of 2003 compared to the third quarter of 2002. Operating results were also negatively impacted by costs incurred to support European sales growth including: - costs associated with establishing the Company's Formatex moulding, assembly and sequencing facility located in Poland to service the VW Group T5 (Transit Van) and the SLW (City Car) Polish production programs (operations commenced at a temporary facility in the second quarter of 2003); and - costs associated with the construction and launch of the Company's new Belplas paint line and the takeover of the Brussels Sequencing Centre both to service a portion of the production volume on the VW Group A5 (Golf) program commencing in the fourth quarter of 2003. The aggregate net change in operating income in the third quarter of 2003 compared to the third quarter of 2002 at Formatex, Belplas and the Brussels Sequencing Centre was a reduction of US$3.9 million. The above costs were partially offset by: - income now being generated at the Company's Modultec mould in colour, assembly and sequencing facility which was launched in Germany in the fourth quarter of 2002 to supply the VW Group T5 (Transit Van) program and the Company's Graz, Austria assembly and sequencing facility which was launched in the first quarter of 2003 to supply Magna Steyr's DaimlerChrysler Mercedes E Class 4 Matic program (the aggregate net change in operating income in the third quarter of 2003 compared to the third quarter of 2002 at Modultec and Graz, was an improvement of US$1.5 million); - improvements at the Company's other European facilities, most notably within the paint operations at its Decorate trim facility in Germany; and - continued strong operating profits generated at the Company's Innoplas fascia facility in Germany despite lower production volumes on its highest content program, the DaimlerChrysler Mercedes C Class, and costs associated with the DaimlerChrysler Mercedes A Class program that will launch in the fourth quarter of 2004. Finally, Merplas' operating loss improved to US$2.1 million for the third quarter of 2003 compared to a loss of US$3.0 million for the third quarter of 2002. This improvement was realised despite the reduced fixed cost coverage effects of a significant drop in production sales as a result of lower Jaguar X400 production volumes. The improvement relates, in part, to the recovery of tooling and engineering costs that were expensed in prior periods. However, the balance of the improvement reflects the impact of significant operating improvements implemented at Merplas over the last two years. Readers are asked to refer to the "Outlook - United Kingdom" section of this MD&A for further discussion regarding Merplas. Equity Income Income from equity accounted investments, which includes the Company's 40% share of Bestop, Inc. ("Bestop") and Modular Automotive Systems, LLC, increased to US$0.4 million for the third quarter of 2003 compared to a loss of US$0.3 million for the third quarter of 2002 due to closure costs accrued in the third quarter of 2002 with respect to one of Bestop's facilities. Interest Expense Interest expense for the third quarter of 2003 declined to US$2.6 million compared to US$3.1 million for the third quarter of 2002 as a result of lower interest rates and a reduction in average interest bearing net debt (including bank indebtedness, long-term debt including current portion and debt due to Magna including current portion, less cash and cash equivalents) levels. The interest rate paid on the first tranche of Euro denominated debt due to Magna declined from 7.0% in the third quarter of 2002 to 3.14% in the third quarter of 2003. Amortisation of Discount on Convertible Series Preferred Shares The Company's amortisation of the discount on the portion of the Convertible Series Preferred Shares classified as debt increased to US$2.3 million for the third quarter of 2003 compared to US$2.0 million for the third quarter of 2002. The increase reflects the translation of Canadian dollar amortisation into the Company's U.S. dollar reporting currency and increased amortisation on the Series 4 and 5 Convertible Series Preferred Shares as the liability amount approaches face value, partially offset by lower amortisation as a result of the discount on the Series 3 Convertible Series Preferred Shares being fully amortised as of July 31, 2002. Income Taxes The Company's effective income tax rate for the third quarter of 2003 increased to 39.6% from 39.4% for the third quarter of 2002. The effective income tax rate for the third quarter of 2003 increased as European losses that are not currently being tax benefited and non- deductible Convertible Series Preferred Share amortisation both grew in proportion to the Company's consolidated pretax income. The Company's effective tax rate continues to be high due to Convertible Series Preferred Share amortisation which is not deductible for tax purposes and losses which are not being tax benefited primarily in the United Kingdom, Belgium and Poland. Cumulative unbenefited tax loss carryforwards total approximately US$104 million. Substantially all of these losses have no expiry date and will be available to shelter future taxable income in these jurisdictions. Net Income Net income for the third quarter of 2003 declined to US$14.8 million from US$18.6 million for the third quarter of 2002. This decline is primarily attributable to an increase in European operating losses; the impact on North American operating income of program changeovers, lower production volumes and lower volumes on certain high content programs, Decostar costs and OEM customer pricing pressures; and foreign exchange losses in the corporate segment. Financing Charges The deduction from net income of dividends declared and paid on the Convertible Series Preferred Shares (comprised of dividends declared on the Convertible Series Preferred Shares less the reduction of the Convertible Series Preferred Shares dividend equity component) increased to US$1.5 million for the third quarter of 2003 compared to US$1.1 million for the third quarter of 2002. The increase reflects translation of Canadian dollar dividends into the Company's U.S. dollar reporting currency and a reduction in the Convertible Series Preferred Shares dividend equity component offset as the portion of the dividend equity component related to the Series 1, 2 and 3 Convertible Series Preferred Shares was previously fully utilised. In March of 2003, the Company issued the Debentures. Financing charges, net of income tax recoveries, related to the Debentures were US$1.0 million in the third quarter of 2003. The Company has the option to settle Debenture interest, and principal on redemption or maturity, with Class A Subordinate Voting Shares. In addition, the holders of the Debentures have the right to convert the Debentures into Class A Subordinate Voting Shares at a fixed price at any time. As a result, under Canadian generally accepted accounting principles ("GAAP"), the Debentures are presented as equity and the carrying costs associated with the Debentures are charged to retained earnings. Therefore, Debenture carrying charges do not impact net income. However, because interest on the Debentures is paid in preference to common shareholders, the Debenture carrying charges reduce net income attributable to Class A Subordinate Voting and Class B Shares. Readers are asked to refer to note 9 to the Company's unaudited interim consolidated financial statements for the three and nine month periods ended September 30, 2003 included elsewhere herein for further discussion regarding the Debentures. Diluted Earnings Per Share ------------------------------------------------------------------------- Three Month Periods Ended September 30, % 2003 2002 Change ------------------------------------------------------------------------- Earnings per Class A Subordinate Voting or Class B Share (U.S. dollars) Basic US$0.17 US$0.26 (35%) Diluted 0.16 0.21 (24%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average number of Class A Subordinate Voting and Class B Shares Outstanding (in millions) Basic 73.2 67.9 8% Diluted 106.4 98.4 8% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings per share for the third quarter of 2003 declined to US$0.16. The decrease is due to the decline in net income and an increase in the weighted average number of diluted Class A Subordinate Voting and Class B Shares outstanding, up 8% to US$106.4 million for the third quarter of 2003. The increase is the result of the issuance of the Debentures and the issuance of 451,400 and 548,600 Class A Subordinate Voting Shares to the Decoma employee deferred profit sharing program during the third quarter of 2002 and second quarter of 2003, respectively. The increase in the weighted average number of basic Class A Subordinate Voting and Class B Shares outstanding is due to the issuance of 14,895,729 Class A Subordinate Voting Shares on conversion of the Series 1, 2 and 3 Convertible Series Preferred Shares during the quarter. This transaction negatively impacted basic earnings per share but had no impact on diluted shares outstanding or diluted earnings per share. Readers are asked to refer to the "Consolidated Capitalisation" section of this MD&A for further discussion regarding the conversion. Nine Month Periods Ended September 30, 2003 and 2002 Sales ------------------------------------------------------------------------- Nine Month Periods Ended September 30, --------------------------- % 2003 2002 Change ------------------------------------------------------------------------- Light Vehicle Production Volumes (in millions) North America 12.0 12.5 (4%) Western Europe 12.3 12.2 1% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average Content Per Vehicle (U.S. dollars) North America US$ 92 US$ 84 10% Europe 37 30 23% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Production Sales (U.S. dollars in millions) North America US$1,100.0 US$1,041.5 6% Europe Excluding Merplas 431.8 339.9 27% Merplas 19.9 28.0 (29%) ------ ------ Total Europe 451.7 367.9 23% Global Tooling and Other Sales 158.0 119.1 33% ------------------------------------------------------------------------- Total Sales US$1,709.7 US$1,528.5 12% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating Income (U.S. dollars in millions) North America US$159.5 US$148.7 7% Europe Excluding Merplas (3.1) 6.7 Merplas (8.8) (10.6) 17% Merplas deferred preproduction expenditure write-off - (8.3) ------ ------ Total Europe (11.9) (12.2) 2% Corporate (14.8) (5.5) ------------------------------------------------------------------------- Total Operating Income US$132.8 US$131.0 1% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per Class A Subordinate Voting or Class B Share (U.S. dollars) Basic US$ 1.00 US$ 0.98 2% Diluted 0.80 0.78 3% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average number of Class A Subordinate Voting and Class B Shares Outstanding (in millions) Basic 69.8 67.7 3% Diluted 103.5 98.3 5% ------------------------------------------------------------------------- ------------------------------------------------------------------------- North America North American production sales grew by 6% to US$1,100.0 million in the first nine months of 2003. A 4% decline in North American vehicle production volumes negatively impacted sales by US$43.6 million. However, this decline was offset by significant growth in North American content per vehicle which grew US$8 or 10% to approximately US$92 for the first nine months of 2003. Translation of Canadian dollar sales into the Company's U.S. dollar reporting currency added approximately US$62.9 million to production sales and US$5 to North American content per vehicle. In addition, the FM Lighting Acquisition added approximately US$29.8 million to production sales and US$2 to North American content per vehicle. The remaining US$9.4 million increase in North American production sales and US$1 increase in North American content per vehicle is the result of new takeover business; sales on programs that launched during or subsequent to the third quarter of 2002; and strong volumes on certain high content programs; partially offset by the changeover of a number of large production programs; lower production volumes on certain long running high content programs; reduced content on certain programs; the closure of the Company's Montreal based specialty vehicle operation; and the sale of a non-core North American operating division in the first quarter of 2002. Continued. (See part 3) DATASOURCE: Decoma International Inc. For further information: S. Randall Smallbone, Executive Vice President, Finance and Chief Financial Officer of Decoma at +1 (905) 669-2888

Copyright