/FIRST AND FINAL ADD - TO230 - Decoma announces financial results
for fourth quarter & year end 2003/ DECOMA INTERNATIONAL INC.
Management's Discussion and Analysis of Results of Operations and
Financial Position Years ended December 31, 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 is current as of
February 25, 2004 and should be read in conjunction with the
Company's unaudited interim consolidated financial statements for
the three and twelve month periods ended December 31, 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
-------------------------------------------------------------------------
Years Ended Three Month Periods December 31, Ended December 31,
------------------------ ----------------------- % % 2003 2002
Change 2003 2002 Change
-------------------------------------------------------------------------
1 Cdn dollar equals U.S. dollars 0.716 0.637 12.4% 0.760 0.638
19.1% 1 Euro equals U.S. dollars 1.132 0.946 19.7% 1.192 1.000
19.2% 1 British Pound equals U.S. dollars 1.635 1.503 8.8% 1.708
1.572 8.7%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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,
foreign currency transactions in the current period have not been
fully impacted by the recent movements in exchange rates. Readers
are asked to refer to the "Financial condition, Liquidity and
Capital Resources - Forward Foreign Currency Contracts" section of
this MD&A for further discussion. 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 The following
table isolates the year over year impact of certain unusual income
and expense items on the Company's key earnings measures.
-------------------------------------------------------------------------
(U.S. dollars, in millions Operating Net Diluted except per share
figures) Income Income EPS
-------------------------------------------------------------------------
2002 as reported $173.7 $93.0 $1.03 Addback Merplas deferred
preproduction expenditures write-off 8.3 8.3 0.08 Deduct other
income in 2002 - (3.4) (0.03)
-------------------------------------------------------------------------
Adjusted 2002 base 182.0 97.9 1.08 United Kingdom impairment charge
(12.4) (12.4) (0.12) Continental Europe paint capacity
consolidation charges (11.4) (11.4) (0.11) Future net tax liability
revaluation - (1.1) (0.01) Other income in 2003 - 1.4 0.01 Decrease
over adjusted 2002 base (7.0) (4%) (2.5) (3%) (0.08) (7%)
-------------------------------------------------------------------------
2003 as reported $151.2 $71.9 $0.77
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total sales grew to $2,355.8 million in 2003. Total sales benefited
$204.1 million from translation. Excluding the impact of
translation, total sales increased $95.0 million or 5% over 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
facility startups and higher tooling sales. As shown in the table
above, diluted earnings per share in 2003 was impacted by: - the
United Kingdom impairment and continental Europe paint capacity
consolidation charges (see the "Other Charges"section of this
MD&A for further discussion); - the revaluation of future net
tax liabilities due to an increase in the future Ontario, Canada
income tax rate (see the "Results of Operations - Years Ended
December 31, 2003 and 2002 - Income Taxes" section of this MD&A
for further discussion); and - other income from the permanent
repatriation of funds from foreign operations (see the "Results of
Operations - Years Ended December 31, 2003 and 2002 - Other Income"
section of this MD&A for further discussion). Similarly, 2002
diluted earnings per share was impacted by: - the Merplas deferred
preproduction expenditures write-off (see the "Other Charges"
section of this MD&A for further discussion); and - other
income from the disposition of a non-core North American operating
division and from the permanent repatriation of funds from foreign
operations (see the "Results of Operations - Years Ended December
31, 2003 and 2002 - Other Income" section of this MD&A for
further discussion). Excluding the above items, diluted earnings
per share declined $0.08 in 2003 compared to 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 "Convertible
Debentures") and to 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, and due to a $2.5 million decline in net
income. The decline in net income was due to a $7.0 million
reduction in operating income primarily as a result of an $8.0
million increase in European operating losses and an $8.4 million
increase in corporate segment losses primarily the result of
foreign exchange losses on U.S. dollar denominated monetary items
held in Canada. These reductions were partially offset by a $9.4
million increase in North American operating income. OTHER CHARGES
Year Ended December 31, 2003 United Kingdom Impairment Charge The
Company operates two facilities in the United Kingdom, Merplas and
Sybex. Given the magnitude of Merplas' historic losses, the Merplas
results have been separately disclosed in the Company's MD&A in
order to better explain the performance of the European operating
segment. The Merplas facility was initially built to service the
X400 program assembled at Jaguar's Halewood plant, and other Jaguar
programs, including the X100 program, with additional capacity to
service other future business opportunities. Production volumes on
the Jaguar X400 and X100 programs continue at levels that are well
below original planning volume estimates of 115,000 and 11,000,
respectively. In 2003, production volumes were approximately 52,700
and 6,500 for theX400 and X100, respectively. Despite low volumes,
Merplas has steadily reduced its operating losses from $23.4
million in 2001 to $11.5 million in 2003 through its continuous
improvement efforts. The Sybex facility's major programs include
theBMW Mini and various Rover and Ford PAG Landrover programs.
Sybex's operating income in 2003 and 2002 was $1.2 million and $0.5
million, respectively. While BMW Mini program volumes are strong,
long term Rover volumes are subject to uncertainty. In addition,
declines in Sybex's current Landrover business were expected to be
offset by the award of Landrover's Freelander fascia program which
will launch in 2006 (Freelander volumes are expected to approximate
75,000 vehicles annually afterramp up). However, as a result of
Ford PAG's decision to produce its 2006 Freelander program at its
Halewood, England plant, the Company has decided to relocate its
related 2006 Freelander fascia production from Sybex to the closer
Merplas facility. Upon completion of the 2004 business planning
process, the Company identified a number of indicators of United
Kingdom long-lived asset impairment including the continuation of
budgeted United Kingdom operating losses, uncertain
long-termproduction volumes for the United Kingdom market in
general which affect certain of the Company's existing programs,
and excess paint capacity in the United Kingdom market. These
impairment indicators required the Company to assess its United
Kingdom asset base for recoverability. Estimated discounted future
cash flows were used to determine the amount of the write-down. The
result of this assessment was a write-down of $12.4 million of
certain of the long- lived assets at the Company's Sybex facility.
Although Merplas has experienced significant historic operating
losses, the decision to relocate the 2006 Freelander fascia program
from Sybex to Merplas significantly improves Merplas' long-term
outlook. However, without additional new business, Sybex's
long-term outlook deteriorates. Although the possibility of
obtaining incremental new business remains, the Company has been
unable to advance incremental business opportunities for Sybex to
the point of concluding theyare reasonably probable. This
write-down will have no near term impact on operations at either
Merplas or Sybex, which will continue their operations in the
normal course. As a result of cumulative losses in the United
Kingdom, this impairment charge has not been tax effected. This
impairment charge had no impact on depreciation expense in 2003.
However, as a result of the impairment charge, depreciation expense
in 2004 is expected to be reduced by approximately $2.5 million.
Continental Europe Paint Capacity Consolidation Charges During
2003, the Company completed, and committed to, a plan to
consolidate its continental Europe paint capacity. This plan
entails mothballing the Company's Decoform paint line in Germany
and transferring Decoform's painted trim and fascia business to the
Company's newer paint lines at its Decorate and Belplas facilities
in Germany and Belgium, respectively. Decoform will continue to
mold and assemble products for Decorate. The consolidation required
the write-down of the carrying value of the Decoform paint line.
The consolidation will also result in severance costs associated
with a reduction of the Decoform workforce of 284 employees. Total
charges in 2003 related to the continental Europe paint capacity
consolidation plan were $11.4 million. Decoform employees have a
contractual notice period of up to two quarters following the
quarter in which individual notice is given. The consolidation plan
envisions substantially all employees working through their
contractual notice periods with paint line production transfers and
employee terminations completed by the end of 2004. There will be
no reduction in sales as a result of the consolidation of these
operations. The consolidation will avoid the need for significant
future capital expenditures at the Decoform facility and Decoma
believes that the consolidation will also improve long-term EBIT at
the affected facilities in 2005 and beyond by reducing operating
overheads and paint line depreciation and by improving the
utilization rates within the Company's Decorate and Belplas paint
operations. These continental Europe paint capacity consolidation
charges have resulted in large accounting losses in Germany and
create both taxable temporary difference and loss carryforward
future tax assets. A full valuation allowance has been provided
against these future tax assets resulting in no net tax recovery
against these charges in the consolidated income statement. Year
Ended December 31, 2002 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 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. As a
result of cumulative losses in the United Kingdom, this write-down
has not been tax effected. RESULTS OF OPERATIONS Years Ended
December 31, 2003 and2002 Sales
-------------------------------------------------------------------------
Years Ended December 31, --------------------------------- % (U.S.
dollars in millions) 2003 2002 Change
-------------------------------------------------------------------------
Light Vehicle Production Volumes (in millions) North America 15.864
16.323 (3%) Western Europe 16.428 16.341 1%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Content Per Vehicle (U.S. dollars) North America $95 $85
12% Europe 39 30 30%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Production Sales (U.S. dollars in millions) North America $1,506.8
$1,391.5 8% Europe Excluding Merplas 616.1 457.1 35% Merplas 30.4
34.7 (12%) --------- --------- Total Europe 646.5 491.8 31% Global
Tooling and Other Sales 202.5 173.4 17%
-------------------------------------------------------------------------
Total Sales $2,355.8 $2,056.7 15%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 8% to $1,506.8
million in 2003. A 3% decline in North American vehicle production
volumes negatively impacted sales by $42.0 million. However, this
decline was offset by significant growth in North American content
per vehicle. North American content per vehicle grew $10 or 12% to
approximately $95. Translation of Canadian dollar sales into the
Company's U.S. dollar reporting currency added approximately $102.1
million to production sales and $6 to North American content per
vehicle. In addition, the FM Lighting Acquisition added
approximately $51.9 million to production sales and $3 to North
American content per vehicle. The remaining net $3.3 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 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, the DaimlerChrysler DR (Ram pickup) program and the Ford
U222 (Expedition) program. These increases were partially offset
by: - end of production on the DaimlerChrysler LH (Concorde,
Intrepid and 300M) program during 2003 (the new Daimler Chrysler LX
program did 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
year (V229 (Freestar) fascia production was transferred by Ford to
a competitor at the end of 2003); - 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 and end of production during 2002 on the
Ford CT120 (Escort) 4 door program all in Mexico; - reduced content
on the DaimlerChrysler RS (Minivan) program; - 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; and - the
impact of OEM price concessions. Europe European production sales
increased 31% to $646.5 million in 2003 on substantially level
production volumes. European content per vehicle grew $9 or 30% to
approximately $39 for 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 $83.1 million
to European production sales and $5 to European content per
vehicle. Content growth was also driven by sales at recent new
facility startups in the latter part of 2002 and in 2003 including
the launch of the VW Group T5 (Transit Van) fascia and front end
module assembly and sequencing program 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 program at the Company's new Graz, Austria
facility; the launch of the VW Group A5 (Golf) program in the
fourth quarter of 2003 including fascia production at the Company's
new Belplas paint line and front end module assembly and sequencing
at the Company's new Brussels Sequencing Centre. These new
facilities collectively added approximately $102.9 million to
production sales and $6 to European content per vehicle. The
remaining net $31.3 million reduction in production sales and $2
reduction in content per vehicle is due to anumber of factors
including a decline in production volumes on the Jaguar X400
program produced at Merplas. Merplas' sales declined from $34.7
million in 2002 to $30.4 million in 2003. Adjusting to eliminate
the impact of translation of BritishPound sales into U.S. dollars,
Merplas' sales declined $7.3 million. In addition, European
production sales and content were negatively impacted by lower
volumes on certain long running high content programs such as the
DaimlerChrysler Mercedes CClass and various Rover programs and end
of production of DaimlerChrysler Mercedes E Class trim production,
Landrover Discovery fascia production and the Audi TT hard top
program. These factors were partially offset by the launch of
various newAudi production programs at the Company's facilities in
Germany and strong BMW Mini volumes. Global Tooling and Other
Tooling and other sales on a global basis increased 17% to $202.5
million for 2003. The increase came in both North America and
Europe and is primarily related to translation of Canadian dollar,
Euro and British pound sales into the Company's U.S. dollar
reporting currency which added $18.8 million to tooling sales. The
remaining $10.3 million or 6% increase relates to new program
launches including the Ford U204 (Escape) refresh program in North
America and the VW Group A5 (Golf) program in Europe. Sales by
Customer The Company's sales by customer breakdown for 2003 and
2002 was as follows:
-------------------------------------------------------------------------
Year Ended Year Ended December 31, 2003 December 31, 2002
------------------------ ------------------------ North North
America Europe Global America Europe Global Traditional "Big 3"
Brands Ford 25.4% 2.1% 27.5% 26.5% 2.1% 28.6% GM/Opel/Vauxhaull
22.6% 1.8% 24.4% 23.9% 1.4% 25.3% Chrysler 12.6% 0.8% 13.4% 13.9%
0.7% 14.6%
-------------------------------------------------------------------------
60.6% 4.7% 65.3% 64.3% 4.2% 68.5% VW Group 0.1% 8.8% 8.9% 0.1% 4.7%
4.8% Mercedes - 8.7% 8.7% - 9.4% 9.4% BMW 0.6% 1.7% 2.3% 0.5% 1.6%
2.1% Ford Premier Automotive Group ("Ford PAG") 0.1% 2.1% 2.2% 0.1%
2.3% 2.4% Renault Nissan 1.5% 0.5% 2.0% 1.6% 0.6% 2.2% Other 5.5%
5.1% 10.6% 5.6% 5.0% 10.6%
-------------------------------------------------------------------------
68.4% 31.6% 100.0% 72.2% 27.8% 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) Included above are sales to Asian new domestics 4.1% 0.1% 4.2%
3.8% 0.3% 4.1%
-------------------------------------------------------------------------
The Company continues to grow it sales with original equipment
manufacturer ("OEM") customers outside the traditional "Big 3"
automotive brands. The growth in sales to the VW Group is the
resultof the launch of the VW Group T5 (Transit Van) and A5 (Golf)
fascia and front end module programs and the recent launch of a
number of new Audi programs. The Company's sales to the VW Group
are expected to continue to grow as the VW A5 (Golf) program ramps
up and the VW SLW (City Car) program launches at Formatex. Sales to
Mercedes are also expected to grow with the launch of both the A
Class program in the second half of 2004 and the Decostar facility
in 2005. The Company's largest production sales programs for 2003
in each of North America and Europe included: North America - Ford
U152 (Explorer) - DaimlerChrysler JR (Stratus, Sebring and Sebring
Convertible) - Ford EN114 (Crown Victoria and Grand Marquis) -
DaimlerChrysler DR (Ram pick up) - DaimlerChrysler LH (Concorde,
Intrepid and 300M) Europe - DaimlerChrysler Mercedes C Class - VW
Group T5 (Transit Van) - BMW Mini - Audi B6 (A4) - Opel Epsilon The
DaimlerChrysler LH (Concorde, Intrepid and 300M) program remained
one of the Company's largest North American production sales
programs despite the fact that this program ended in the third
quarter of 2003 and the new LX program does not start up until the
first quarter of 2004. Although the Company has significant North
American business with General Motors, including a number of
individually significant programs such as the GMX 210 (Impala),
individual General Motors' programs are outside the Company's top
5sales dollar programs. Gross Margin Gross margin increased to
$464.7 million in 2003 compared to $423.4 million in 2002. As a
percentage of total sales, gross margin declined to 19.7% compared
to 20.6% for 2003 and 2002, respectively. The gross margin
percentage in North America was substantially unchanged at 25.0% in
2003 compared to 24.7% in 2002. The Company's ongoing continuous
improvement programs, favourable purchase price variances on net
U.S. dollar purchases within the Company's Canadian operations and
increased claims for eligible research and development investment
tax credits enabled the North American segment to successfully
offset the impact of 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; increased costs within the Company's systems
integration operations with the launch of two new facilities in
2003 and costs in preparation for the launch of additional
facilities in 2004; growth in the Company's lighting business which
currently operates at lower margins; and FM Lighting Acquisition
integration costs. European gross margin declined to 8.2% in 2003
compared to 9.8% in 2002. The decline in the European gross margin
percentage is due primarily to new facility startups and the growth
in front end module assembly and sequencing sales and the lower
margins associated with purchased components. In addition,
continued operating inefficiencies and other performance issues at
the Company's Prometall and Decoform facilities negatively impacted
gross margin. These negative impacts were partially offset by
improvements at Merplas and within the Company's paint operations
at its Decorate trim facility. The competitive environment within
the automotive industry continues to cause the Company's customers
to increase pressurefor price concessions and to finance or absorb
more engineering costs related to product design, tooling costs and
certain capital and other items. The Company has been largely
successful in the past in responding to these pressures through
improved operating efficiencies and cost reductions. However,
customer pressure for price concessions has intensified in recent
quarters. Although the Company remains highly focused on continuous
improvement activities, continued significant incremental price
concessions could have an adverse impact on the Company's gross
margin percentage. Depreciation and Amortization Depreciation and
amortization costs increased to $89.9 million for 2003 compared to
$78.3 million for 2002. Of this increase, $7.1 million is
attributable to the translation of Canadian dollar, Euro and
British Pound depreciation expense into the Company's U.S. dollar
reporting currency. The Company's ongoing capital spending program
also contributed to increased depreciation expense including
commencement of depreciation at the Company's new Belplas paint
line in the fourth quarter of 2003. These increases were partially
offset by a reduction in Merplas deferred preproduction
amortization as a result ofthe 2002 write-down of Merplas' deferred
preproduction expenditures. Depreciation expense in 2002 includes
$0.7 million of Merplas deferred preproduction amortization prior
to the write-down. Depreciation as a percentage of total sales was
substantially unchanged at 3.8% in 2003 and 2002. Depreciation on
capital invested at Decostar will not commence until commercial
production begins which is now scheduled for the first quarter of
2005. Selling, General and Administrative ("S,G&A") S,G&A
costs were $175.3 million for 2003, up from $137.9 million for
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 $15.0 million. In addition, foreign exchange losses
increased by $7.8 million in 2003 compared to 2002 largely on U.S.
dollar denominated monetary items held in Canada. The impact of the
Company's change in accounting policy to expense stock options
granted on or after January 1, 2003 increased S,G&A expense by
$0.3 million (readers are asked to refer to note 7 to the Company's
unaudited interim consolidated financial statements for the three
and twelve month periods ended December 31, 2003, included
elsewhere herein). The remaining $14.3 million increase in
S,G&A expense is related to the Company's Decostar and Belplas
projects; the FM Lighting Acquisition; and additional S,G&A
expense at recently launchedfacilities including Modultec,
Formatex, Graz and the Brussels Sequencing Centre in Europe and
increased costs within the Company's systems integration operations
with the launch of two new facilities in 2003 and costs in
preparation for the launch of additional facilities in 2004. As a
percentage of total sales, S,G&A increased to 7.4% for 2003
compared to 6.7% for 2002. In addition to the benefits provided by
Magna International Inc. and its subsidiaries ("Magna") to Decoma
under the affiliation agreement noted below, Magna provides certain
management and administrative services to the Company, including
specialized legal, environmental, immigration, tax, treasury,
information systems (including wide area network infrastructure and
support services) and employee relations services (including
administration of Decoma's Employee Equity Participation and Profit
Sharing Program), in return for a specific amount negotiated
between the Company and Magna which includes an allocated share of
the facility and overhead costs dedicated to providing those
services. The Company is currently in discussions with Magna with
respect to a formal long-term agreement detailing these
arrangements. The cost of management and administrative services
provided by Magna and included in S,G&A was $4.2 million for
2003 compared to $3.6 million for 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, internet audit services, Tier 1 development assistance,
global expansion assistance, vehicle system integration and modular
product strategy assistance, and sharing of best practices in areas
such as new management techniques, employee benefits and programs,
marketing and technology development initiatives. 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
acquisitionsin 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 othercharitable programs on behalf of
Magna and its affiliated companies, including Decoma. Affiliation
and social fees expense for 2003 decreased to $24.5 million from
$25.3 million for 2002. Affiliation fee expense in 2002 was 1.25%
through July 31 and 1.0% thereafter on consolidated net sales, less
the Autosystems related fee holiday. Affiliation fees for 2003 were
1.0% of consolidated net sales, less the acquisition related fee
holidays primarily related to the FM Lighting Acquisition. The
decrease in the 2003 affiliation and social fees expense is the
result of a lower effective affiliation fee rate in 2003 compared
to 2002 and reduced social fee expenses due to a reduction in the
pretax profits on which the social fees arecalculated, partially
offset by an increase in consolidated net sales on which the
affiliation fees are calculated. Affiliation and social fee expense
as a percentage of total sales declined to 1.0% in 2003 compared to
1.2% in 2002.
-------------------------------------------------------------------------
Years Ended December 31, -------------------------- % (U.S. dollars
in millions) 2003 2002 Change
-------------------------------------------------------------------------
Operating Income North America $213.8 $204.4 5% Europe Excluding
Merplas and other charges (10.8) 1.8 Merplas excluding deferred
preproduction expenditures write-off (11.5) (16.1) 29% Merplas
deferred preproduction expenditures write-off - (8.3) United
Kingdom impairment charge (12.4) - Continental Europe paint
capacity consolidation charges (11.4) - ------ ------ Total Europe
(46.1) (22.6) (104%) Corporate (16.5) (8.1)
-------------------------------------------------------------------------
Total Operating Income $151.2 $173.7 (13%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a percentage of total sales, operating income before other
charges was 7.4% for 2003 compared to 8.8% for 2002. The increase
in the corporate segment operating loss is attributable to an
increase in foreign exchange losses of $7.6 million on U.S. dollar
denominated monetary items held in Canada, one time severance costs
and the impact of the Company's change in accounting policy to
expense stock options granted onor after January 1, 2003 which
added $0.3 million to the corporate segment operating loss. North
America North American operating income increased $9.4 million to
$213.8 million for 2003. As a percentage of total North American
sales, North American operating income was 13.2% in 2003 compared
to 13.7% in 2002. The 0.5% decline in North American operating
income as a percentage of total sales is the result of: - a 0.8%
increase in S,G&A expenses as a percentage of total sales from
5.8% in 2002 to 6.6% in 2003 as a result of increased costs related
to the Company's lighting business including integration costs
related to the FM Lighting Acquisition, increased costs related to
Decostar and the Company's systems integration operations and the
impact of a temporary reduction in sales as a result of 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) without a similar temporary
reduction in S,G&A costs; and - a 0.1% increase in depreciation
expense as a percent of total sales from 3.7% in 2002 to 3.8%in
2003; partially offset by - a 0.1% reduction in affiliation and
social fees as a percentage of total sales as a result of the
reduction in the affiliation fee rate and as a result of the
acquisition fee holiday related to the FM Lighting Acquisition,
partially offset by the elimination of the acquisition affiliation
fee holiday related to the 2001 acquisition of Autosystems; and - a
0.3% improvement in the North American gross margin percentage.
Europe European operating losses were negatively impacted by the
United Kingdom impairment and continental Europe paint capacity
consolidated charges, partially offset by the Merplas deferred
preproduction expenditures write-off in 2002. Excluding other
charges, European operating income declined $8.0 million. 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 $10.0 million in 2003 compared to 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 originally scheduled to come from the
Company's existing Decoform facility and from third parties
(Decoform Porsche production has now been shifted to Belplas as a
result of the Company's continental Europe paint capacity
consolidation plan); 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 $0.6
million in 2003 compared to 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; 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 2003 compared to2002 at
Formatex, Belplas and the Brussels Sequencing Centre was a
reduction of $9.4 million. Finally, during the fourth quarter of
2003, the Company completed the acquisition of HDO Galvano-und
Oberflachentechnik GmbH ("HDO") which operateda chroming line
adjacent to the Company's Idoplas facility. The line is being
converted to allow for grille chroming and will be integrated into
Idoplas' operations. The Company expects to launch the chroming
line in early 2004 and commence the insourcing of grille chroming
business currently outsourced by Decoma's European operations at
that time. As a result, the fourth quarter of 2003 was negatively
impacted by chroming line start-up and launch costs. 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 2003 comparedto 2002 at Modultec and
Graz, was an improvement of $1.4 million); and - 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 second half of
2004 (operating income at these two facilities combined improved
$5.3 million in 2003 compared to 2002). Finally, Merplas' operating
loss before other charges improved to $11.5 million for 2003
compared to a loss of $16.1 million in 2002. Adjusting to eliminate
the impact of translation of British Pound operating losses into
U.S. dollars, Merplas' operating loss declined $6.0 million in 2003
compared to 2002. This improvement was realized 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. 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 $1.8 million for
2003 compared to $0.5 million for 2002 due to closure costs in 2002
with respect to one of Bestop's facilities and theresulting
improvement in operating performance as a result of the closure.
Interest Expense Interest expense for 2003 declined to $10.7
million compared to $12.0 million for 2002 as a result of 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 and interest capitalized on the Company's Decostar and
Belplas paint line projects of $1.3 million in 2003 (nil in 2002)
partially offset by translation of Canadian dollar and Euro
interest into the Company's U.S. dollar reporting currency. In
addition, lower interest rates on debt due to Magna contributed to
the reduction. The original interest rate on the first and second
tranches of Euro denominated debt due to Magna was 7.0%. The first
and second tranches were due October 1, 2002 and October 1, 2003,
respectively. However, since the original maturity dates of this
debt, the Company, with Magna's consent, was extending the
repayment of this debt at 90 day intervals at market interest rates
ranging from 3.14% to 4.29%. Substantially all of this debt was
repaid in December 2003. Interest on debt due to Magna and its
affiliates and included in reported interest expense amounted to
$11.3 million in 2003 compared to $10.1 million in 2002. This
increase is the result of translation of Canadian dollar and Euro
interest into the Company's U.S. dollar reporting currency
partially offset by the interest rate reductions described above.
Amortization of Discount on Convertible Series Preferred Shares The
Company's amortization of the discount on the portion of the
Convertible Series Preferred Sharesheld by Magna classified as debt
increased to $8.6 million for 2003 compared to $8.4 million for
2002. The increase reflects the translation of Canadian dollar
amortization into the Company's U.S. dollar reporting currency and
increased amortization on the Series 4 and 5 Convertible Series
Preferred Shares as the liability amount approaches face value,
partially offset by lower amortization as a result of the discount
on the Series 3 Convertible Series Preferred Shares being fully
amortized as of July 31, 2002. As of December 31, 2003, the Series
4 Convertible Series Preferred Shares are fully amortized.
Therefore, amortization in 2004 will be reduced as it will be
limited to amortization on the Series 5 Convertible Series
Preferred Shares only. Other Income Other income in 2003 of $1.4
million represents the recognition in income of a pro rata amount
of the Company's cumulative translation adjustment account on the
permanent repatriation of $75 million of the Company's net
investment in its United States operations. This amount was not
subject to tax. Other income in 2002 includes a $3.9 million gain
on the sale of a non- core North American operating division.
Income tax expense for 2002 includes $1.0million related to this
gain. In addition, other income in 2002 includes $0.5 million as a
result of the recognition in income of a pro rata amount of the
Company's cumulative translation adjustment account on the
permanent repatriation of Euro 10 million of the Company's net
investment in its continental Europe operations. This amount was
not subject to tax. Income Taxes The Company's effective income tax
rate for 2003 increased to 46.8% from 41.2% for 2002. As explained
in the "Other Charges" section of this MD&A, the other charges
in 2003 and 2002 were not tax effected which negatively impacted
the Company's effective tax rate. Similarly, the Company's other
income in 2003 and 2002 was either fully or partially not subjectto
tax. In addition, as a result of an increase in future Ontario,
Canada income tax rates and the resulting required revaluation of
the Company's future net tax liabilities, the Company's 2003 tax
expense increased by $1.1 million. Excluding other charges, other
income and the future net tax liability revaluation as a result of
Ontario, Canada future tax rate changes, the Company's effective
tax rate for 2003 was substantially unchanged at 39.4% compared to
39.6% for 2002. The Company's effective tax rate continues to be
high due to Convertible Series Preferred Share amortization which
is not deductible for tax purposes and losses which are not being
tax benefited primarily in the United Kingdom, Germany, Belgium and
Poland.Cumulative unbenefited tax loss carryforwards total
approximately $143 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 2003
declined to $71.9 million from $93.0 million for 2002. Excluding
the impact of other charges, other income and the future net tax
liability revaluation, the Company's net income declined $2.5
million (readers are asked to refer to the "Overview" section of
this MD&A for further discussion). The decline in net income
was due to reduced operating income partially offset by lower
interest expense. Financing Charges The deduction from net income
of financing charges on the Convertible Series Preferred Shares
held by Magna (comprised of dividends declared on the Convertible
Series Preferred Shares less the reduction of the Convertible
Series Preferred Shares dividend equity component) decreased to
$4.5 million for 2003 compared to $4.8 million for 2002. The
decrease reflects the conversion of the Series 1, 2 and 3
Convertible Series Preferred Shares into the Company's Class A
Subordinate Voting Shares in August 2003 partially offset by the
translation of Canadian dollar dividends into the Company's U.S.
dollar reporting currency. In March of 2003, the Company issued the
Convertible Debentures. Financing charges, net of income tax
recoveries, related to the Convertible Debentures were $3.0 million
in 2003. The Company has the option to settle Convertible Debenture
interest, and principal on redemption or maturity, with Class A
Subordinate Voting Shares. In addition, the holders of the
Convertible Debentures have the right to convert into Class A
Subordinate Voting Shares at a fixed price at any time. As a
result, under current Canadian generally accepted accounting
principles ("GAAP"), the Convertible Debentures are presented as
equity and the carrying costs associated with the Debentures are
charged to retained earnings. Therefore, Convertible Debenture
carrying charges do not impact net income. However, because
interest on the Convertible Debentures is paid in preference to
common shareholders, the Convertible Debenture carryingcharges
reduce net income attributable to Class A Subordinate Voting and
Class B Shares. The Canadian Institute of Chartered Accountants
recently amended Handbook Section 3860, "Financial Instruments -
Disclosure and Presentation", to require certain obligations that
may be settled with an entity's own equity instruments to be
reflected as a liability. The amendments must be adopted in the
Company's 2005 consolidated financial statements with retroactive
application. Upon adoption, theConvertible Debentures currently
presented entirely within equity on the consolidated balance sheet
will have to be presented in part as a liability and in part as
equity and the related liability carrying costs will be presented
as a charge tonet income. Diluted Earnings Per Share
-------------------------------------------------------------------------
Years Ended December 31, -------------------------- % 2003 2002
Change
-------------------------------------------------------------------------
Earnings per Class A Subordinate Voting or Class B Share (U.S.
dollars) Basic $0.88 $1.30 (32%) Diluted 0.77 1.03 (25%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A Subordinate Voting and Class B Shares
outstanding (in millions) Basic 73.4 67.8 8% Diluted 104.3 98.3 6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 VotingShares on
conversion of the Series 1, 2 and 3 Convertible Series Preferred
Shares during the third quarter of 2003. This transaction
negatively impacted basic earnings per share but had no impact on
diluted shares outstanding or diluted earnings per share. Readers
are asked to refer to the "Consolidated Capitalization" section of
this MD&A for further discussion regarding the conversion.
Diluted earnings per share for 2003 declined to $0.77. Excluding
the impact of other charges, otherincome and the future net tax
liability revaluation, the Company's diluted earnings per share
declined $0.08 (readers are asked to refer to the "Overview"
section of this MD&A for further discussion). 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 the Convertible Debentures and
to 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, and due to the $2.5 million decline in net income.
The maximum number of shares that would be outstanding if all of
the Company's stock options, Convertible Series Preferred Shares
and Convertible Debentures issued and outstanding as at December
31, 2003 were exercised or converted would be 108.8 million. (Refer
to note 11 of the Company's consolidated financial statements,
included elsewhere herein, for further discussion.) Three Month
Periods Ended December 31, 2003 and 2002 Sales
-------------------------------------------------------------------------
Three Month Periods Ended December 31, -------------------------- %
2003 2002 Change
-------------------------------------------------------------------------
Light Vehicle Production Volumes (in millions) North America 3.898
3.865 1% Western Europe 4.155 4.185 (1%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Content Per Vehicle (U.S. dollars) North America $ 104 $ 91
14% Europe 47 30 57%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Production Sales (U.S. dollars in millions) North America $ 406.9 $
350.0 16% Europe Excluding Merplas 184.3 117.2 57% Merplas 10.5 6.7
57% -------- -------- Total Europe 194.8 123.9 57% Global Tooling
and Other Sales 44.5 54.3 (18%)
-------------------------------------------------------------------------
Total Sales $ 646.2 $ 528.2 22%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating Income (U.S. dollars in millions) North America $ 54.3 $
55.7 (3%) Europe Excluding Merplas and other charges (7.8) (4.9)
(59%) Merplas (2.6) (5.5) 53% United Kingdom impairment charge
(12.4) - Continental Europe paint capacity consolidation charges
(11.4) - -------- -------- Total Europe (34.2) (10.4) Corporate
(1.5) (2.6)
-------------------------------------------------------------------------
Total Operating Income $ 18.6 $ 42.7 (56%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per Class A Subordinate Voting or Class B Share (U.S.
dollars) Basic $ (0.06) $ 0.32 Diluted (0.06) 0.25
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A Subordinate Voting and Class B Shares
outstanding (in millions) Basic 83.5 68.1 23% Diluted 83.5 98.3
(15%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America North American production sales grew by 16% to $406.9
million in the fourth quarter of 2003 on substantially level
vehicle production volumes. Significant growth in North American
content per vehicle, up $13 or 14% to approximately $104 for the
fourth quarter of 2003, accounted for the increase in sales.
Translation of Canadian dollar sales into the Company's U.S. dollar
reporting currency added approximately $40.2 million to production
sales and $10 to North American content per vehicle. In addition,
the FM Lighting Acquisition added approximately $22.1 million to
production sales and $6 to North American content per vehicle. The
remaining $5.4 million decrease in North American production sales
and $3 decrease in North American content per vehicle is primarily
the result of the changeover of a number of large production
programs including the DaimlerChrysler LH (Concorde, Intrepid and
300M) program which ended in the third quarter of 2003 (the new LX
program does not start up until the first quarter of 2004). Europe
European production sales increased 57% to $194.8 million in the
fourth quarter of 2003 on substantially level European production
volumes. European content per vehicle grew $17 or 57% to
approximately $47. Content growth was driven by the translation of
Euro and British Pound sales into the Company's U.S. dollar
reporting currency whichadded approximately $20.4 million to
production sales and $5 to European content per vehicle. Content
growth was also driven by sales at recent new facility startups in
the latter part of 2002 and 2003 (including Modultec, Formatex,
Graz, the Company's new Belplas paint line and the Brussels
Sequencing Centre). These new facilities collectively added
approximately $52.2 million to production sales and $13 to European
content per vehicle. The remaining net $1.7 million reduction in
production sales and $1 reduction in European content per vehicle
is due to lower production volumes and lower volumes on certain
long running high content programs including lower volumes on the
DaimlerChrysler C Class and Opel Vectra programs. These declines
were partially offset by an improvement in Jaguar X400 program
volumes at Merplas. Adjusting to eliminate the impact of
translation of British Pound sales into U.S. dollars, Merplas'
sales increased $3.2 million positively impactingEuropean content
per vehicle by $1. Global Tooling and Other Tooling and other sales
on a global basis decreased 18% to $44.5 million for the fourth
quarter of 2003. The decrease came primarily in Europe where the
comparative quarter included a significant amount of tooling sales
related to programs at the Company's new European start-up
facilities. Earnings Growth The following table isolates the
quarter over quarter impact of certain unusual income and expense
items on the Company's key earnings measures.
-------------------------------------------------------------------------
(U.S. dollars, in millions Operating Net Diluted except per share
figures) Income Income EPS
-------------------------------------------------------------------------
Quarter ended December 31, 2002 as reported $42.7 $23.1 $0.25
Deduct other income in the fourth quarter of 2002 - (0.5) (0.01)
-------------------------------------------------------------------------
Adjusted quarter ended December 31, 2002 42.7 22.6 0.24 United
Kingdom impairment charge (12.4) (12.4) (0.12) Continental Europe
paint capacity consolidation charges (11.4) (11.4) (0.11) Future
net tax liability revaluation - (1.1) (0.01) Effect of convertible
instruments being anti-dilutive in the quarter ended December 31,
2003 - - (0.04) Decrease over adjusted quarter ended December 31,
2002 base (0.3) (1%) (1.5) (7%) (0.02) (8%)
-------------------------------------------------------------------------
Quarter ended December 31, 2003 as reported $18.6 $(3.8) $(0.06)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the "Other Charges" section of this MD&A for a discussion
of the United Kingdom impairment and continental Europe paint
capacity consolidation charges. Other income in the fourth quarter
of 2002 of $0.5 million represents the recognition in income of a
pro rata amount of the Company's cumulative translation adjustment
account on the permanent repatriation of Euro 10 million of the
Company's net investment in its continental Europe operations. This
amount was not subject to tax. Excluding other charges and other
income, operating income declined $0.3 million or 1% in the fourth
quarter of 2003 compared to the fourth quarter of 2002 due
primarily to a decrease in North American operating income. As a
percentage of total sales, North American operating income declined
to 12.5% in the fourth quarter of 2003 compared to 15.1% in the
fourth quarter of 2002. The decline is due to end of production on
the DaimlerChrysler LH (Concorde, Intrepid and 300M) program,
increased Decostar costs and to operating inefficiencies in the
fourth quarter at two of the Company's trim facilities. European
operating losses before other charges were unchanged at $10.4
million. Continuous improvements at Merplas and higher Jaguar X400
volumes helped to offset increased operating losses elsewhere in
Europe. Excluding other charges, other income and the future net
tax liability revaluation (see the "Results of Operations -
YearsEnded December 31, 2003 and 2002 - Income Taxes" section of
this MD&A for further discussion), net income declined $1.5
million or 7%. The larger percentage decline in net income compared
to operating income is due primarily to an increase in the
Company's effective tax rate in the fourth quarter of 2003 compared
to 2002 as a result of an increase in valuation allowances against
German and Belgium losses partially offset by lower United Kingdom
losses. As a result of the United Kingdom impairment and
continental Europe paint capacity consolidated charges, the
Company's Convertible Debentures and Series 4 and 5 Convertible
Series Preferred Shares are anti-dilutive in the fourth quarter of
2003. Therefore, the average number ofdiluted Class A Subordinate
Voting and Class B Shares in the fourth quarter of 2003 excludes
7,547,170 and 15,151,516 Class A Subordinate Voting Shares issuable
on conversion of the Convertible Debentures and the Series 4 and 5
Convertible Series Preferred Shares, respectively. Diluted earnings
per share, excluding other charges, other income and the future net
tax liability revaluation, declined $0.02 or 8%. FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES Cash Flows for the Years
Ended December 31, 2003 and 2002
-------------------------------------------------------------------------
Years Ended December 31, ----------------------- (U.S. dollars in
millions) 2003 2002
-------------------------------------------------------------------------
EBITDA before non-cash impairment charges North America $ 276.2 $
259.9 Europe Excluding Merplas 14.2 21.7 Merplas (9.0) (13.2)
Continental Europe paint capacity consolidation charges (6.7) -
---------- ---------- Total Europe (1.5) 8.5 Corporate (16.5) (8.1)
-------------------------------------------------------------------------
258.2 260.3 Interest, cash taxes and other operating cash flows
(74.7) (71.7)
-------------------------------------------------------------------------
Cash flow from operations before changes in non-cash working
capital 183.5 188.6 Cash (invested in) generated from non-cash
working capital (51.6) 50.0 Fixed and other asset spending, net
North America (114.2) (57.5) Europe (71.3) (50.6) Acquisition
spending North America (13.3) (2.6) Europe (5.8) - Proceeds from
disposition of operating division - 5.7 Convertible Debenture
interest payments (3.8) - Dividends Convertible Series Preferred
Shares (12.2) (12.1) Class A Subordinate Voting and Class B Shares
(18.8) (14.2)
-------------------------------------------------------------------------
Cash generated and available for debt reduction (shortfall to be
financed) (107.5) 107.3 Repayments of debt due to Magna (72.4)
(7.8) Net decrease in long-term debt (0.1) (10.9) Net increase
(decrease) in bank indebtedness 109.7 (110.3) Issuance of
Convertible Debentures 66.1 - Issuances of Class A Subordinate
Voting Shares 4.7 4.7 Foreign exchange on cash and cash equivalents
11.0 4.8
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ 11.5 $
(12.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company has presented EBITDA before non-cash impairment charges
as supplementary information concerning the cash flows of the
Company and its operating segments. The breakdown of both EBITDA
before non-cash impairment charges and fixed and other asset and
acquisition spending by segment provides readers with an indication
of where cash is being generated and used. The Company defines
EBITDA beforenon-cash impairment charges (totalling $258.2 million
and $260.3 million in 2003 and 2002, respectively) as operating
income ($151.2 million and $173.7 million in 2003 and 2002,
respectively) plus depreciation and amortization ($89.9 million and
$78.3 million in 2003 and 2002, respectively) plus the United
Kingdom impairment charge ($12.4 million in 2003) plus the non-cash
portion of the continental Europe paint capacity consolidation
charges ($4.8 million in 2003) and plus the Merplas deferred
preproduction expenditures write-off ($8.3 million in 2002) based
on the respective amounts presented in the Company's consolidated
statements of income included elsewhere herein. However, EBITDA
before non-cash impairment charges does not have any standardized
meaning under Canadian GAAP and is, therefore, unlikely to be
comparable to similar measures presented by other issuers. Cash
Generated and Available for Debt Reduction (Shortfall to be
Financed) Investments in non-cash working capital, capital and
acquisition spending, Convertible Debenture interest and dividends
exceeded cash generated from operations by $107.5 million for 2003
compared to an excess of cash generated from operations, non-cash
working capital and proceeds from disposition over capital and
acquisition spending and dividends of $107.3 million in 2002. This
change was due primarily to $51.6 million being invested in
non-cash working capital in 2003 compared to $50.0 million being
generated from non-cash working capital in 2002. The increase in
working capital is primarily the result of increased European
working capital with higher sales from new facilities, increases in
tooling related amounts and an increase in taxes receivable
partially offset by accruals related to the continental Europe
paint capacity consolidation plan. In addition, increased capital
and acquisition spending and dividends and Convertible Debenture
interest also contributed to the usage of cash. Investing
Activities Capital spending, excluding acquisition spending, on a
global basis totalled $185.5 million in 2003. Given economic
uncertainties throughout 2001 and 2002, the Company eliminated or
delayed planned capital spending wherever possible. However,
capital spending for 2003 has increased. The increase reflects
spending to complete the Belgium paint line during 2003, continued
Decostar spending, European spending related to new program
launches including spending for the DaimlerChrysler A Class program
which will launch in 2004 and spending due to prior deferrals of
previously planned facility upgrade and other process related and
improvement projects. Spending on Decostar will continue in 2004.
Spending for2004 is expected to approximate $151 million. Readers
are asked to refer to the "Financial Condition, Liquidity and
Capital Resources - Unused and Available Financing Resources"
section of this MD&A for further discussion. Acquisition
spending in 2003 includes $10.4 million for the FM Lighting
Acquisition, $2.9 million for the repayment of promissory notes
that arose on the May 2001 acquisition of the remaining minority
interest in the Company's Mexican operations and $5.8 million
forthe acquisition of HDO in Europe. Dividends Dividends paid on
the Company's Convertible Series Preferred Shares were $12.2
million for 2003 up from $12.1 million in 2002 due to translation
of Canadian dollar dividends into the Company's U.S.dollar
reporting currency partially offset by reduced dividends as a
result of the conversion of the Series 1, 2 and 3 Convertible
Series Preferred Shares into Class A Subordinate Voting Shares
during the year. Dividends paid in 2003 on Class A Subordinate
Voting and Class B Shares totalled $18.8 million. This represents
dividends paid of US$0.07 per share in respect of the three month
periods ended September 30 and June 30, 2003 and US$0.06 per share
in respect of the three month periods ended March 31, 2003 and
December 31, 2002. Dividends paid during 2002 on Class A
Subordinate Voting and Class B Shares totalled $14.2 million
representing dividends declared of US$0.06 in respect of the three
month period ended September 30, 2002 and US$0.05 per share in
respect of the three month periods ended June 30 and March 31, 2002
and December 31, 2001. Subsequent to December 31, 2003, the board
of directors of the Company declared a dividend of US$0.07 per
Class A Subordinate Voting and Class B Share in respect of the
three month period ended December 31, 2003. Financing Activities
The $107.5 million shortfall in cash generated from operations over
cash invested in non-cash working capital, capital and acquisition
spending, Convertible Debenture interest and dividends, was covered
with $66.1 million raised through the issuance of Convertible
Debentures, the issuance of $4.7 million Class A Subordinate Voting
Shares to the Decoma employee deferred profit sharing plan and with
additional draws on the Company's $300 million operating credit
facility. The Company's $300 million operating credit facility was
also drawn upon to fund the repayment of $72.4 million of debt due
to Magna. As a result, bank indebtedness grew to $177.3 million at
December 31, 2003 compared to $55.0 million at December 31, 2002.
Cash and cash equivalents at December 31, 2003 were $93.5 million
compared to $82.1 million at December 31, 2002. The Company's
bankindebtedness is currently drawn substantially in Canada.
However, the Company held cash primarily in the United States,
Europe and Mexico at the year end. Although there are no long-term
restrictions on the flow of funds from one jurisdiction to the
other, there may be costs, such as withholding taxes, to move funds
between jurisdictions. As a result, the Company is not always able
to immediately apply the cash held in certain jurisdictions against
bank borrowings in other jurisdictions. Cash Flows for the Three
Month Periods Ended December 31, 2003 and 2002
-------------------------------------------------------------------------
Three Month Periods Ended December 31, -----------------------
(U.S. dollars in millions) 2003 2002
-------------------------------------------------------------------------
EBITDA before non-cash impairment charges North America $ 71.6 $
70.1 Europe Excluding Merplas and other charges (0.1) (0.1) Merplas
(2.0) (4.9) Continental Europe paint capacity consolidation charges
(6.7) - ---------- ---------- Total Europe (8.8) (5.0) Corporate
(1.5) (2.6)
-------------------------------------------------------------------------
61.3 62.5 Interest, cash taxes and other operating cash flows
(17.6) (17.8)
-------------------------------------------------------------------------
Cash flow from operations before changes in non-cash working
capital 43.7 44.7 Cash generated from non-cash working capital 43.6
46.5 Fixed and other asset spending, net North America (36.6)
(23.9) Europe (28.6) (29.8) Acquisition spending Europe (5.8) -
Convertible Debenture interest payments (2.5) - Dividends
Convertible Series Preferred Shares (2.2) (3.0) Class A Subordinate
Voting and Class B Shares (5.8) (4.1)
-------------------------------------------------------------------------
Cash generated and available for debt reduction 5.8 30.4 Repayments
of debt due to Magna (72.3) - Net increase (decrease) in long-term
debt 4.0 (0.3) Net increase (decrease) in bank indebtedness 90.4
(35.0) Foreign exchange on cash and cash equivalents 4.0 3.0
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ 31.9 $ (1.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Generated and Available for Debt Reduction Cash generated from
operations and non-cash working capital exceeded capital and
acquisition spending and Convertible Debenture interest and
dividends by $5.8 million for the fourth quarter of 2003 compared
to $30.4 million for the fourth quarter of 2002. The decline is due
primarily to increased capital and acquisition spending.
Acquisition spending in the current quarter is related to the
European HDO purchase. Financing Activities The Company repaid
$72.3 million of debt due to Magna. This was funded by borrowings
on the Company's $300 million operating credit facility. The
increase in long-term debt in the current quarter is primarily the
result of capital leases in Europe for injection molding machines.
Consolidated Capitalization
-------------------------------------------------------------------------
December 31, December 31, (U.S. dollars in millions) 2003 2002
-------------------------------------------------------------------------
Cash and cash equivalents ($93.5) ($82.1) Bank indebtedness 177.3
55.0
-------------------------------------------------------------------------
83.8 (27.1) Debt due within twelve months Due to Magna, repaid
subsequent to year end (previously due December 31, 2003) 3.5 38.3
Due to Magna March 31, 2004 (previously due December 31, 2003) 46.5
64.2 Due to Magna December 31, 2004 90.6 - Other 6.0 8.0
-------------------------------------------------------------------------
146.6 110.5 Long-term debt Due to Magna December 31, 2004 - 75.1
Other 11.2 9.7
-------------------------------------------------------------------------
Net Conventional Debt $ 241.6 24.0% $ 168.2 22.6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liability portion of Convertible Series Preferred Shares, held by
Magna Current $ 150.6 $ 95.6 Long-term - 116.2
-------------------------------------------------------------------------
$ 150.6 15.0% $ 211.8 28.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shareholders' equity Convertible Debentures $ 66.1 6.6% $ - Other
547.5 54.4% 362.7 48.9%
-------------------------------------------------------------------------
$ 613.6 61.0% $ 362.7 48.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Capitalization $ 1,005.8 100.0% $ 742.7 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the year, Magna converted the Series 1, 2 and 3 Convertible
Series Preferred Shares into Decoma 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 Convertible Debentures
and the remaining Series 4 and 5 Convertible Series Preferred
Shares are also convertible into Class A Subordinate Voting Shares
at the holders' option at fixed prices (Cdn$13.25 per share in the
case of the Debentures and Cdn$13.20 per share in the case of the
Series 4 and 5 Convertible Series Preferred Shares). The Company's
Class A Subordinate Voting Shares closed at Cdn $12.42 on February
12, 2004, and have traded between Cdn $8.81 and Cdn $14.95 over the
52 week period ended February 12, 2004. As a result, it is possible
that all, or a portion, of the Convertible Debentures and the
Series 4 and 5 Convertible Series Preferred Shares will be settled
with Class A Subordinate Voting Shares if the holders exercise
their fixed price conversion options. The possible conversions of
the Company's Convertible Debentures and Series 4 and 5 Convertible
Series Preferred Shares into Class A Subordinate Voting Shares is
reflected in the Company's reported full year diluted earnings per
share. In addition to the fixed price conversion options noted
above, Magna may retract the Convertible Series Preferred Shares
for cash at their face value after December 31, 2003 in the case of
the Series 4 Convertible Series Preferred Shares and commencing
December 31, 2004 in the case of the Series 5 Convertible Series
Preferred Shares. Accordingly, the liability portion of the Series
4 and 5 Convertible Series Preferred Shares is shown as current in
the Company's consolidated balance sheet. Should the holders' of
the Convertible Debentures not exercise their fixed price
conversion option,they are entitled to receive cash on redemption
or maturity (subject to the Company's option of retiring the
Convertible 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). The Convertible Debentures mature on March 10,2010 but
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 Convertible
Debentures are redeemable at the Company's option at any time. The
Company can call the Series 4 and 5 Convertible Series Preferred
Shares for redemption commencing December 31, 2005. The Company's
Net Conventional Debt to Total Capitalization at December 31, 2003
was 24.0% compared to 22.6% at December 31, 2002. This measure
treats the Company's hybrid Convertible Debenture and Convertible
Series Preferred Share instruments like equity rather than debt
given their possible conversion into Class A Subordinate Voting
Shares. The Company's Net Conventional Debt plus the liability
portions of the Convertible Series Preferred Shares to Total
Capitalization, has improved to 39.0% at December 31, 2003 compared
to 51.1% at December 31, 2002. This measure treats the liability
portions of the Convertible Series Preferred Shares like debt
rather than equity given their possible retraction for cash. The
Company's Net Conventional Debt plus the liability portions of the
Convertible Series Preferred Shares plus the Convertible Debentures
to Total Capitalization was 45.6% at December 31, 2003 compared to
51.1% at December 31, 2002. In addition to the liability portions
of the Convertible Series Preferred Shares, this measure treats the
Convertible Debentures like debt rather than equity given the
possibility of settling them for cash on maturity or redemption
rather than for Class A Subordinate Voting Shares. Readers are
asked to refer to the "Results of Operations - Years Ended December
31, 2003 and 2002 - Financing Charges" section of this MD&A for
a discussion regarding the impact of a pending accounting change in
2005 that will impact the accounting for, and presentation of, the
Company's Convertible Debentures. Unused and Available Financing
Resources At December 31, 2003 the Company had cash on hand of
$93.5 million and $122.7 million of unused and available credit
representing the unused and available portion of the Company's $300
million extendible, revolving credit facility that expires on May
27, 2004 at which time Decoma may request, subject to lender
approval, further revolving 364 day extensions. Debt, excluding
bank indebtedness, that comes due in the next twelve months totals
$146.6 million including debt due to Magna consisting of $3.5
million repaid subsequent to year end, $46.5 million due March 31,
2004 and $90.6 million due December 31, 2004. Since the original
maturity of the amounts due March 31, 2004, the Company, with
Magna's consent, has been extending the repayment of this debt at
90 dayintervals at market interest rates. Although the Company
expects Magna to continue to extend the repayment date for this
debt, there can be no assurance that Magna will do so. The Company
anticipates that working capital investments, capital expenditures
and currently scheduled repayments of debt will exceed cash
generated from operations in 2004. As a result, the Company is
dependent on its lenders to continue to revolve its existing $300
million credit facility. Although the Company expects the credit
facility will continue to revolve, there can be no assurance that
it will continue to revolve under terms and conditions as
favourable as those currently in place. In addition, the Company
may seek additional debt or equity financing and/or pursue further
extensions of the maturity dates of debt due to Magna or work with
Magna to establish a new fixed long term amortization schedule
related to this debt. In addition to the above unused and available
financing resources, the Company sponsors a finance program for
tooling suppliers to finance tooling under construction for the
Company. Under this program, the facility provider orders tooling
from suppliers and subsequently sells such tooling to the Company.
The facility provider makes advances to tooling suppliers based on
tool build milestones approved by the Company. On completion of the
tooling the facility provider sells the tooling to the Company for
an amount equal to cumulative advances. In the event of tooling
supplier default, the Company will purchase in progress tooling for
an amount approximating cumulative advances. A number of Magna
affiliated companies are sponsors under this facility. The maximum
facility amount is $100 million and is available to individual
sponsors on an uncommitted demand basis subject to individual
sponsor sub limits and, therefore, the facility provider may, at
any time, refuse to purchase additional tooling under this
facility. The Company's sub limit is $35 million. As at December
31, 2003, $0.3 million had been advanced to tooling suppliers under
the Company's portion of this facility. This amount is included in
accounts payable. Off Balance Sheet Financing The Company's off
balance sheet financing arrangements are limited to operating lease
contracts. A number of the Company's facilities are subject to
operating leases with Magna and with third parties. Operating lease
expense for facilities in 2003 amounted to $24.8 million including
$11.8 million under lease arrangements with affiliates of Magna. As
of December 31, 2003, operating lease commitments for facilities
totalled $25.4 million for 2004 including $13.0 million under lease
arrangements with affiliates of Magna. For 2008, total operating
lease commitments for facilities totalled $19.0 million including
$11.7 million under lease arrangements with affiliates of Magna. In
certain situations, the Company has posted letters of credit to
collateralize lease obligations. The Company also has third party
operating lease commitments for equipment. These leases are
generally of shorter duration. Operating lease expense for
equipment in 2003 amounted to $5.8 million. As of December 31,
2003, operating lease commitments for equipment totalled $8.2
million for 2004. For 2008, operating lease commitments for
equipment totalled $3.3 million. Although the Company's
consolidated contractual annual lease commitments decline year by
year, existing leases will either be renewed or replaced resulting
in lease commitments being sustained at current levels or the
Company will incur capital expenditures to acquire equivalent
capacity. Forward Foreign Currency Contracts The Company operates
in North America and Europe, which gives rise to a risk that its
earnings, cash flows and shareholders' equity may be adversely
impacted by fluctuations in foreign exchange rates amongst the four
principal currencies in which the Company currently conducts
business; namely, the U.S. and Canadian dollars, the British Pound
and the Euro. Operating as a global company, Decoma transacts
business through operating divisions whose functional currency is
generally the currency of the division's country of residence,
except for the Company's operations in Mexico where the functional
currency is the U.S. dollar. To protect against the reduction in
value of foreign currency cash flows resulting from foreign
currency customer and supplier contracts, the Company has
instituted a foreign currency cash flow hedging program. The
Company hedges portions of its cash flows denominated in currencies
other than the applicable division's functional currency with
forward contracts. The Company formally documents all relationships
between hedging instruments and hedged items, as well as its risk
management objective and strategy for undertaking various hedge
transactions. This process includes linking all derivatives to
specific assets and liabilities on the balance sheet or to specific
firm commitments or forecasted transactions. The Company also
formally assesses, both at the hedge's inception and on an ongoing
basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair
values or cash flows of hedged items. Any gains and losses on these
hedging instruments, including the forward premium or discount on a
forward foreign currency contract relating to the period prior to
consummation of the foreign currency cash flow, are recognized in
the same period as, and as part of, the hedged transaction. The
Company does not enter into forward foreign currency contracts for
speculative purposes. At December 31, 2003, the Company's
outstanding forward foreign currency contracts included contracts
to sell Canadian dollars in return for U.S. dollars totalling
Cdn$37.0 million and Cdn$10.3 million in 2004 and 2005,
respectively, at weighted average rates of 0.7334 U.S. dollars per
Canadian dollar. Similarly, at December 31, 2003, the Company's
United Kingdom operations had outstanding forward foreign currency
contracts to sell British pounds in return for Euros totalling GBP
5.8million and GBP 2.6 million in 2004 and 2005, respectively, at
weighted average rates of 1.4950 Euros per British Pound. These
contracts are designated and effective as hedges of the Canadian
operations' net U.S. dollar purchase requirements and the United
Kingdom operations' net Euro purchase requirements, respectively,
primarily for raw materials. In addition, the Company's outstanding
forward foreign currency contracts included contracts to sell Euros
in return for U.S. dollars totalling $11.4 million in 2004 at
weighted average rates of 1.1725 U.S. dollars per Euro which are
designated and effective as hedges of the European operations' U.S.
dollar affiliation fee payment requirements. Return on Investment
Decoma defines after tax return on common equity as net income
attributable to Class A Subordinate Voting and Class B Shares over
shareholders' equity excluding Convertible Debentures and the
equity portion of Convertible Series Preferred Shares. After
taxreturn on common equity was 15% and 29% for the years ended
December 31, 2003 and 2002, respectively. The decline reflects the
United Kingdom impairment and continental Europe paint capacity
consolidation charges, the conversion of the Series 1, 2 and 3
Convertible Series Preferred Shares into Class A Subordinate Voting
Shares and translation, particularly of European net assets into
the Company's U.S. dollar reporting currency. Each operating
segment's return on investment is measuredusing return on funds
employed. Return on funds employed is defined as operating income
plus equity income divided by long term assets, excluding future
tax assets, plus non-cash working capital. Return on funds employed
represents a return on investment measure before the impacts of
capital structure. The Company views capital structure as a
corporate, rather than operating segment, decision.
-------------------------------------------------------------------------
Return on Funds Employed Funds Employed -------------------
------------------- Years Ended As at December 31, December 31,
------------------- ------------------- (U.S. dollars in millions)
2003 2002 2003 2002
-------------------------------------------------------------------------
North America 34% 35% $ 720.1 $ 569.3 Europe Excluding Merplas
(14%) 1% 283.1 193.6 Merplas (42%)(66%) 28.7 26.9 Corporate n/a n/a
21.0 (0.1)
-------------------------------------------------------------------------
Global 17% 22% $1,052.9 $ 789.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Return on funds employed was 17% in 2003. Return on funds employed
for 2003 compared to 2002was negatively impacted by the United
Kingdom impairment and continental Europe paint capacity
consolidation charges; increased non-cash working capital
investments; and increased investments in Europe, particularly with
the new Belplas paint line, and in North America at Decostar.
Translation, particularly of European funds employed into the
Company's U.S. dollar reporting currency, also negatively impacted
return on funds employed. These negative impacts were partially
offset by the 2002 write-down of Merplas deferred preproduction
expenditures. OTHER SELECTED FINANCIAL INFORMATION The Company is
required to disclose its contractual obligations as of December 31,
2003 as follows:
-------------------------------------------------------------------------
As at December 31, 2003 -----------------------------------------
Less than 2-3 4-5 More than (U.S. dollars in millions) 1 year years
years 5 years
-------------------------------------------------------------------------
Long-term debt and capital lease obligations $ 146.6 $ 7.3 $ 3.3 $
0.6 Liability portion of Convertible Series Preferred Shares 150.6
- - - Operating lease commitments 33.7 61.8 47.0 99.6 Purchase
obligations (i) - - --
-------------------------------------------------------------------------
Total contractual obligations and commitments $ 330.9 $ 69.1 $ 50.3
$ 100.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) The Company had no unconditional purchase obligations other
than those related to inventory, services, tooling and fixed assets
in the ordinary course of business. In addition to the above, the
Company's obligations with respect to employee future benefit
plans, which have been actuarially determined, were $7.5 million at
December 31, 2003 broken down as follows:
-------------------------------------------------------------------------
Canada & Canada & U.S. Post U.S. German Retirement (U.S.
dollars in millions) Pension Pension Medical Total
-------------------------------------------------------------------------
Projected benefit obligation $ 6.8 $ 3.3 $ 9.0 $ 19.1 Less plan
assets (5.2) - - (5.2)
-------------------------------------------------------------------------
Unfunded amount 1.6 3.3 9.0 13.9 Unrecognized past service costs
and actuarial losses (1.3) - (5.1) (6.4)
-------------------------------------------------------------------------
Amount recognized in other long-term liabilities $ 0.3 $ 3.3 $ 3.9
$ 7.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company is also required to disclose the following selected
annual information for the most recent three fiscal years:
-------------------------------------------------------------------------
Years Ended (U.S. dollars, in millions except December 31,
----------------------------- per share figures) 2003 2002 2001
-------------------------------------------------------------------------
Total sales $2,355.8 $2,056.7 $1,815.9 Net income 71.9 93.0 68.7
Earnings per Class A Subordinate Voting or Class B Share Basic 0.88
1.30 1.00 Diluted 0.77 1.03 0.81 Cash dividends declared per Class
A Subordinate Voting and Class B Share in respect of each period
0.26 0.21 0.18
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets 1,525.5 1,192.5 1,169.2 Total long-term liabilities,
excluding future taxes 18.7 205.7 310.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Changes in total sales, net income and earnings and cash dividends
per Class A Subordinate Voting or Class B Share between 2003 and
2002 are explained in this MD&A. The growth in total assets is
a result of translation of Canadian dollar, Euro and British Pound
operations into the Company's U.S. dollar reporting currency,
capital spending and investments in non-cash working capital.
Long-term liabilities at December 31, 2002 includes debt due to
Magna of $75.1 million and the liability portions of the Series 4
and 5 Convertible Series Preferred Shares of $116.1 million. These
amounts are current at December 31, 2003. The growth in 2002 sales
and earnings compared to 2001 is the result of strong performance
by the Company's North American segment. The ramp up of programs
that launched in 2001, the Autosystems lighting acquisition,
takeover programs that launched at the beginning of 2002,
favourable production volume program mix and a year with relatively
few major new program launches and associated launch costs all
contributed to strong sales and earnings in North America. In the
Company's Europe segment, production sales increased as a result of
the ramp up of the BMW Mini and Jaguar X400 programs and as a
result of translation of Euro and British Pound salesinto the
Company's U.S. dollar reporting currency. However, combined
production sales in Germany and Belgium, measured in Euros,
declined as a result of lower vehicle production volumes including
lower volumes on certain high content programs. This sales decline,
in conjunction with costs to support significant future European
sales growth, contributed to a decline in European, excluding
Merplas, operating income. Merplas, on the other hand, reduced its
operating losses before the write-off of deferred preproduction
expenditures. The Company is also required to disclose the
following selected quarterly information for the most recent eight
quarters:
-------------------------------------------------------------------------
Three Month Periods Ended ---------------------------------------
(U.S. dollars, in millions December September June 30, March 31,
except per share figures) 31, 2003 30, 2003 2003 2003
-------------------------------------------------------------------------
Total sales $ 646.2 $ 556.4 $ 592.1 $ 561.1 Net income (3.8) 14.7
33.8 27.2 Earnings per Class A Subordinate Voting or Class B Share
Basic (0.06) 0.17 0.46 0.38 Diluted (0.06) 0.16 0.34 0.30
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Month Periods Ended ---------------------------------------
(U.S. dollars, in millions December September June 30, March 31,
except per share figures) 31, 2002 30, 2002 2002 2002
-------------------------------------------------------------------------
Total sales $ 528.2 $ 465.5 $ 565.8 $ 497.1 Net income 23.1 18.6
27.4 23.9 Earnings per Class A Subordinate Voting or Class B Share
Basic 0.32 0.26 0.39 0.34 Diluted 0.25 0.21 0.30 0.27
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Changes in total sales, net income and earnings per Class A
Subordinate Voting or Class B Share between the fourth quarters of
2003 and 2002 are explained in this MD&A. The third quarter is
affected by the normal seasonal effects of lower vehicle production
volumes as a result of OEM summer shutdowns. Sales in 2003 compared
to 2002 benefited from translation of Canadian, Euro and British
Pound sales into the Company's U.S. dollar reporting currency,
sales at new European start up facilities and the FM Lighting
acquisition commencing in the second quarter of 2002. Earnings in
the second half of 2003 compared to 2002 were impacted by North
American programchangeovers, lower vehicle production volumes on
certain high content programs, Decostar costs, customer pricing
pressures, foreign exchange losses on U.S. dollar denominated
monetary items held in Canada and increased losses in Europe
particularly in the third quarter of 2003. FORWARD LOOKING
STATEMENTS The contents of this MD&A contain statements which,
to the extent that they are not recitations of historical fact,
constitute "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The words
"estimate", "anticipate", "believe", "expect" and similar
expressions are intended to identify forward looking statements.
Persons reading this MD&A are cautioned that such statements
are only predictions and that the Company's actual future results
or performance may be materially different. In evaluating such
forward looking statements readers should specifically consider the
various risk factors which could cause actual events or results to
differ materially from those indicated by such forward looking
statements. These risks and uncertainties include, but are not
limited to, specific risks relating to the Company's relationship
with its customers, the automotive industry in general and
theeconomy as a whole. Such risks include, without limitation; the
Company's reliance on its major OEM customers; increased pricing
concession and cost absorption pressures from the Company's
customers; the impact of production volumes and product mix on the
Company's financial performance, including changes in the actual
customer production volumes compared to original planning volumes;
program delays and/or cancellations; the extent, nature and
duration of purchasing or leasing incentive programs offered by
automotive manufacturers and the impact of such programs on future
consumer demand; warranty, recall and product liability costs and
risks; the continuation and extent of automotive outsourcing by
automotive manufacturers; changes in vehicle pricing and the
resulting impact on consumer demand; the Company's operating and/or
financial performance, including the effect of new accounting
standards that are promulgated from time to time (such as the
ongoing requirement for impairment testing of long- lived assets)
on the Company's financial results; the Company's ability to
finance its business requirements and access capital markets; the
Company's continued compliance with credit facility covenant
requirements; trade and labour issues or disruptions impacting the
Company's operations and those of its customers; the Company's
ability to identify, complete and integrate acquisitions and to
realize projected synergies relating thereto; the impact of
environmental related matters including emission regulations; risks
associated with the launch of new facilities, including cost
overruns and construction delays; technological developments by the
Company's competitors; fluctuations in fuel prices and
availability; electricity and natural gas cost volatility;
government and regulatory policies and the Company's ability to
anticipate or respond to changes therein; the Company's
relationship with Magna; currency exposure risk; fluctuations in
interest rates; changes in consumer and business confidence levels;
consumer personal debt levels; disruptions to the economy relating
to acts of terrorism or war; and other changes in the competitive
environment in which the Company operates. In addition, and without
limiting the above, readers are cautionedthat the specific forward
looking statements contained herein relating to the Company's
ability to successfully implement European improvement plans; the
possible conversion of the Company's Convertible Debentures and
Convertible Series Preferred Shares to Class A Subordinate Voting
Shares; the Company's ability to raise necessary future financing;
capital spending estimates; and the recoverability of the Company's
remaining goodwill and other long lived assets, are all subject to
significant risk and uncertainty. Readers are also referred to the
discussion of "Other Factors" set out in the Company's Annual
Information Form dated May 20th, 2003, wherein certain of the above
risk factors are discussed in further detail. The Company expressly
disclaims any intention and undertakes no obligation to update or
revise any forward looking statements contained in this MD&A to
reflect subsequent information, events or circumstances or
otherwise. END FIRST AND FINAL ADD DATASOURCE: Decoma International
Inc. CONTACT: PRNewswire - Feb. 25
Copyright