/FIRST AND FINAL ADD - TO494 - Magna International Inc./
By:
Magna International Inc. via
PR Newswire
Posted on November 06, 2007 at 05:00 AM EST
These factors were partially offset by costs incurred at other new facilities, primarily in China, as we continue to pursue opportunities in this growing market.
Corporate and Other
Corporate and Other EBIT decreased 54% or $27 million to $23 million for the nine months ended September 30, 2007 compared to $50 million for the nine months ended September 30, 2006. Excluding the Corporate and Other unusual items discussed in the "Highlights" section above, EBIT decreased by $34 million, primarily as a result of:
- increased consulting fees incurred with respect to a purchasing
initiative;
- increased salaries and wages and increased incentive compensation;
- increased stock compensation costs related to restricted shares,
specifically:
- during the second quarter of 2007, restricted share agreements
with a former executive were accelerated, which resulted in a
one-time charge to compensation expense of approximately
$10 million, representing the remaining measured but unrecognized
compensation expense related to the restricted shares awarded
during 2006; and
- the write-down of our investment in ABCP as discussed in the
"Financing Resources" section above.
These factors were partially offset by:
- an increase in affiliation fees earned from our divisions; and
- the recovery of a long-term receivable that was previously written
off.
SUBSEQUENT EVENTS
-------------------------------------------------------------------------Subject to approval by the Toronto Stock Exchange ("TSX") and the New York Stock Exchange ("NYSE"), our Board of Directors yesterday approved the purchase for cancellation and/or for purposes of our long-term retention (restricted stock) and restricted stock unit programs, up to 9,500,000 of our Class A Subordinate Voting Shares, representing approximately 9.8% of our public float of Class A Subordinate Voting Shares, pursuant to a normal course issuer bid. The normal course issuer bid is expected to commence on or about November 12, 2007 and will terminate one year later. All purchases of Class A Subordinate Voting Shares will be made at the market price at the time of purchase in accordance with the rules and policies of the TSX and the NYSE, including Rule 10b-18 under the U.S. Securities Exchange Act of 1934.
COMMITMENTS AND CONTINGENCIES
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From time to time, we may be contingently liable for litigation and other claims.
Refer to note 21 of our 2006 audited consolidated financial statements, which describes these claims. On October 26, 2007, we received a favourable award in a previously disclosed arbitration proceeding involving a steel supplier.
CONTROLS AND PROCEDURES
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There have been no changes in our internal controls over financial reporting that occurred during the nine months ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
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The previous discussion may contain statements that, to the extent that they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of applicable securities legislation. Forward-looking statements may include financial and other projections, as well as statements regarding our future plans, objectives or economic performance, or the assumptions underlying any of the foregoing. We use words such as "may", "would", "could", "will", "likely", "expect", "anticipate", "believe", "intend", "plan", "forecast", "project", "estimate" and similar expressions to identify forward-looking statements. Any such forward-looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. However, whether actual results and developments will conform with our expectations and predictions is subject to a number of risks, assumptions and uncertainties. These risks, assumptions and uncertainties include, without limitation, those related to the strategic alliance with Russian Machines, including: the risk that the benefits, growth prospects and strategic objectives expected to be realized from the investment by, and strategic alliance with, Russian Machines may not be fully realized, realized at all or may take longer to realize than expected; we will be governed by a board of directors on which the Stronach Trust and Russian Machines each, indirectly, have the right to designate an equal number of nominees, in addition to the current co-chief executive officers, with the result that we may be considered to be effectively controlled, indirectly, by the Stronach Trust and Russian Machines for so long as the governance arrangements remain in place between them; our Russian strategy involves making investments and carrying on business and operations in Russia, which will expose us to the political, economic and regulatory risks and uncertainties of that country; the possibility that Russian Machines may exercise its right to withdraw its investment and exit from the governance arrangements in connection with the strategic alliance at any time after two years; the possibility that the Stronach Trust may exercise its right to require Russian Machines to withdraw its investment and exit from such arrangements at any time after three years; and the possibility that Russian Machines' lender may require Russian Machines to withdraw its investment and exit from such arrangements at any time if such lender is entitled to realize on its loan to Russian Machines. In addition to the risks, assumptions and uncertainties related to our relationship with Russian Machines, there are additional risks and uncertainties relating generally to us and our business and affairs, including the impact of: declining production volumes and changes in consumer demand for vehicles; a reduction in the production volumes of certain vehicles, such as certain light trucks; the termination or non-renewal by our customers of any material contracts; our ability to offset increases in the cost of commodities, such as steel and resins, as well as energy prices; fluctuations in relative currency values; our ability to offset price concessions demanded by our customers; our dependence on outsourcing by our customers; our ability to compete with suppliers with operations in low cost countries; changes in our mix of earnings between jurisdictions with lower tax rates and those with higher tax rates, as well as our ability to fully benefit tax losses; other potential tax exposures; the financial distress of some of our suppliers and customers; the inability of our customers to meet their financial obligations to us; our ability to fully recover pre-production expenses; warranty and recall costs; product liability claims in excess of our insurance coverage; expenses related to the restructuring and rationalization of some of our operations; impairment charges; our ability to successfully identify, complete and integrate acquisitions; risks associated with program launches; legal claims against us; risks of conducting business in foreign countries; work stoppages and labour relations disputes; changes in laws and governmental regulations; costs associated with compliance with environmental laws and regulations; potential conflicts of interest involving our indirect controlling shareholders, the Stronach Trust and Russian Machines; and other factors set out in our Annual Information Form filed with securities commissions in Canada and our annual report on Form 40-F filed with the United States Securities and Exchange Commission, and subsequent filings. In evaluating forward-looking statements, readers should specifically consider the various factors which could cause actual events or results to differ materially from those indicated by such forward-looking statements. Unless otherwise required by applicable securities laws, we do not intend, nor do we undertake any obligation, to update or revise any forward-looking statements to reflect subsequent information, events, results or circumstances or otherwise.
Three months ended Nine months ended
September 30, September 30,
--------------------- --------------------
Note 2007 2006 2007 2006
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Sales $ 6,077 $ 5,424 $ 19,231 $ 17,812
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Cost of goods sold 5,279 4,789 16,618 15,510
Depreciation and
amortization 220 191 633 580
Selling, general and
administrative 12 330 299 1,058 990
Interest income, net (19) (6) (41) (8)
Equity income - (4) (8) (10)
Impairment charges 4 - - 22 -
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Income from operations
before income taxes 267 155 949 750
Income taxes 112 61 314 251
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Net income 155 94 635 499
Other comprehensive
income: 2,11
Net realized and
unrealized gains
(losses) on
translation of net
investment in
foreign operations 308 (9) 609 216
Repurchase of shares 3 (156) - (156) -
Net unrealized losses
on cash flow hedges (6) - (6) -
Reclassifications of
net (gains) losses
on cash flow hedges
to net income (1) - 3 -
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Comprehensive income $ 300 $ 85 $ 1,085 $ 715
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Earnings per Class A
Subordinate Voting or
Class B Share:
Basic $ 1.40 $ 0.87 $ 5.80 $ 4.60
Diluted $ 1.38 $ 0.86 $ 5.69 $ 4.52
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Cash dividends paid per
Class A Subordinate
Voting or Class B Share $ 0.36 $ 0.38 $ 0.79 $ 1.14
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Average number of Class A
Subordinate Voting and
Class B Shares
outstanding during the
period (in millions):
Basic 110.5 108.6 109.5 108.6
Diluted 113.1 111.4 112.3 111.3
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
(U.S. dollars in millions)
Three months ended Nine months ended
September 30, September 30,
--------------------- --------------------
Note 2007 2006 2007 2006
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Retained earnings,
beginning of period $ 4,206 $ 3,731 $ 3,773 $ 3,409
Net income 155 94 635 499
Dividends on Class A
Subordinate Voting
and Class B Shares (42) (41) (89) (124)
Repurchase of Class A
Subordinate Voting Shares 3 (655) - (655) -
Repurchase of Class B
Shares 3 (24) - (24) -
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Retained earnings,
end of period $ 3,640 $ 3,784 $ 3,640 $ 3,784
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See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in millions)
Three months ended Nine months ended
September 30, September 30,
--------------------- --------------------
Note 2007 2006 2007 2006
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Cash provided from
(used for):
OPERATING ACTIVITIES
Net income $ 155 $ 94 $ 635 $ 499
Items not involving
current cash flows 145 179 623 616
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300 273 1,258 1,115
Changes in non-cash
operating assets and
liabilities (83) 49 (494) (317)
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217 322 764 798
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INVESTMENT ACTIVITIES
Fixed asset additions (174) (198) (436) (544)
Purchase of subsidiaries 6 - (51) (46) (254)
Increase in investments
and other assets 5 (145) (6) (175) (58)
Proceeds from disposition 76 8 103 39
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(243) (247) (554) (817)
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FINANCING ACTIVITIES
Repayments of debt (53) (10) (68) (128)
Issues of debt 3 108 34 126
Issues of Class A
Subordinate Voting
Shares 3,9 1,537 1 1,560 16
Repurchase of Class A
Subordinate Voting
Shares 3,9 (1,091) - (1,091) -
Repurchase of Class B
Shares 3,9 (24) - (24) -
Dividends (42) (41) (89) (123)
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330 58 322 (109)
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Effect of exchange rate
changes on cash and
cash equivalents 115 (2) 235 95
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Net increase (decrease)
in cash and
cash equivalents
during the period 419 131 767 (33)
Cash and cash equivalents,
beginning of period 2,233 1,518 1,885 1,682
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Cash and cash equivalents,
end of period $ 2,652 $ 1,649 $ 2,652 $ 1,649
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See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars in millions)
September 30, December 31,
Note 2007 2006
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ASSETS
Current assets
Cash and cash equivalents $ 2,652 $ 1,885
Accounts receivable 4,518 3,629
Inventories 1,716 1,437
Prepaid expenses and other 2 138 109
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9,024 7,060
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Investments 5 290 151
Fixed assets, net 4,203 4,114
Goodwill 6 1,223 1,096
Future tax assets 2 293 255
Other assets 2 480 478
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$ 15,513 $ 13,154
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness $ 93 $ 63
Accounts payable 3,581 3,608
Accrued salaries and wages 580 453
Other accrued liabilities 2,7 937 426
Income taxes payable 205 135
Long-term debt due within one year 87 98
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5,483 4,783
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Deferred revenue 65 73
Long-term debt 609 605
Other long-term liabilities 2 368 288
Future tax liabilities 2 229 248
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6,754 5,997
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Shareholders' equity
Capital stock 3,9
Class A Subordinate Voting Shares
(issued: 117,860,222;
December 31, 2006 - 108,787,387) 3,800 2,505
Class B Shares
(convertible into Class A
Subordinate Voting Shares)
(issued: 726,829; December 31,
2006 - 1,092,933) - -
Contributed surplus 10 58 65
Retained earnings 3 3,640 3,773
Accumulated other comprehensive
income 2,3,11 1,261 814
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8,759 7,157
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$ 15,513 $ 13,154
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See accompanying notes
MAGNA INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars and all tabular amounts in millions unless
otherwise noted)
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1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Magna
International Inc. and its subsidiaries (collectively "Magna" or the
"Company") have been prepared in United States dollars following
Canadian generally accepted accounting principles ("GAAP") with
respect to the preparation of interim financial information.
Accordingly, they do not include all the information and footnotes as
required in the preparation of annual financial statements and should
be read in conjunction with the December 31, 2006 audited
consolidated financial statements and notes included in the Company's
2006 Annual Report. These interim consolidated financial statements
have been prepared using the same accounting policies as the
December 31, 2006 annual consolidated financial statements, except
for the accounting change set out in note 2.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring adjustments, necessary to present fairly the
financial position at September 30, 2007 and the results of
operations and cash flows for the three-month and nine-month periods
ended September 30, 2007 and 2006.
2. ACCOUNTING CHANGE
In January 2005, the Canadian Institute of Chartered Accountants
approved Handbook Sections 1530, "Comprehensive Income", 3855
"Financial Instruments - Recognition and Measurement", 3861
"Financial Instruments - Disclosure and Presentation", and 3865
"Hedges". The Company adopted these new recommendations effective
January 1, 2007 with no restatement of prior periods, except to
classify the currency translation adjustment as a component of
accumulated other comprehensive income. With the adoption of these
new standards, the Company's accounting for financial instruments and
hedges complies with U.S. GAAP in all material respects as of
January 1, 2007.
Financial Instruments
Under the new standards, all of Magna's financial assets and
financial liabilities are classified as held for trading, held to
maturity investments, loans and receivables, available-for-sale
financial assets, or other financial liabilities. Held for trading
financial instruments, which include cash and cash equivalents, are
measured at fair value and all gains and losses are included in net
income in the period in which they arise. Held to maturity
investments are recorded at amortized cost using the effective
interest method, and include long-term interest bearing government
securities held to partially fund certain Austrian lump sum
termination and long service payment arrangements and our investment
in asset-backed commercial paper ("ABCP"). Loans and receivables,
which include accounts receivable and long-term receivables, accounts
payable, accrued salaries and wages and certain other accrued
liabilities are recorded at amortized cost using the effective
interest method. The Company does not currently have any available
for sale financial assets.
Comprehensive Income
Other comprehensive income includes unrealized gains and losses on
translation of the Company's net investment in self sustaining
foreign operations, and to the extent that cash flow hedges are
effective, the change in their fair value, net of income taxes. Other
comprehensive income is presented below net income on the
Consolidated Statements of Income and Comprehensive Income.
Comprehensive income is composed of net income and other
comprehensive income.
Accumulated other comprehensive income is a separate component of
shareholders' equity which includes the accumulated balances of all
components of other comprehensive income which are recognized in
comprehensive income but excluded from net income.
Hedges
Previously, under Canadian GAAP, derivative financial instruments
that met hedge accounting criteria were accounted for on an accrual
basis, and gains and losses on hedge contracts were accounted for as
a component of the related hedged transaction. The new standards
require that all derivative instruments, whether designated in
hedging relationships or not, be recorded on the balance sheet at
fair value. The fair values of derivatives are recorded in other
assets or other liabilities. To the extent that cash flow hedges are
effective, the change in their fair value is recorded in other
comprehensive income. Amounts accumulated in other comprehensive
income are reclassified to net income in the period in which the
hedged item affects net income.
The impact of this accounting policy change on the consolidated
balance sheet as at January 1, 2007 was as follows:
Increase in prepaid expenses and other $ 28
Increase in other assets 17
Increase in future tax assets 14
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Increase in other accrued liabilities $ 32
Increase in other long-term liabilities 17
Increase in future tax liabilities 13
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Decrease in accumulated other comprehensive income $ 3
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3. RUSSIAN MACHINES TRANSACTION
During the third quarter of 2007, following approval by the Class A
Subordinate Voting and Class B Shareholders of the Company, we
completed the court-approved plan of arrangement (the "Arrangement")
whereby OJSC Russian Machines ("Russian Machines"), a wholly owned
subsidiary of Basic Element Limited, made a major strategic
investment in Magna.
The impact of this transaction on the consolidated balance sheet was
as follows:
Class A
Subordinate Voting
------------------------- Class B
Share Share Share Net
Issuance Repurchase Repurchase Impact
(a) (c) (a)
Number of shares
issued (repurchased) 20,000,000 (11,902,654) (217,400) 7,879,946
Cash received (paid) 1,531 (1,091) (24) 416
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Increase (decrease)
in share capital 1,531 (280) - 1,251
Decrease in retained
earnings - (655) (24) (679)
Decrease in accumulated
other comprehensive
income - (156) - (156)
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Increase (decrease) in
shareholders' equity 1,531 (1,091) (24) 416
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(a) In accordance with the Arrangement:
(i) Russian Machines invested approximately $1.54 billion to
indirectly acquire 20 million Class A Subordinate Voting
Shares of Magna from treasury. We incurred $6 million of
issue costs relating to the issuance.
(ii) The Company purchased 217,400 Class B Shares for
cancellation, representing all the outstanding Class B
Shares, other than those indirectly controlled by the
Stronach Trust, for approximately $24 million, and the
number of votes per each Class B Share was reduced from 500
votes to 300 votes. The excess cash paid over the book value
of the Class B Shares repurchased of $24 million was charged
to retained earnings.
(ii) The Stronach Trust and certain members of the Company's
executive management combined their respective shareholdings
in Magna (in the case of executive management, a portion of
their shareholdings), together with the 20 million Class A
Subordinate Voting Shares issued as part of the Arrangement
into a new Canadian holding company. At September 20, 2007,
the new Canadian holding company indirectly held 100% of the
outstanding Class B Shares and approximately 71.1% of the
votes attached to all the Class A Subordinate Voting Shares
and Class B Shares then outstanding.
(b) Prior to completion of the Arrangement, as a result of the
approval of the Class B Share acquisition by the Minority Class B
Shareholders, Magna caused the conversion of 148,704 Class B
Shares held by the MIC Trust and 865714 Ontario Inc., a wholly-
owned subsidiary of Magna, into Class A Subordinate Voting
Shares.
(c) On September 20, 2007, the Company also completed a substantial
issuer bid pursuant to which it purchased for cancellation
11,902,654 Class A Subordinate Voting Shares, representing 9.2%
of our issued and outstanding Class A Subordinate Voting Shares
for an aggregate purchase price of approximately $1.1 billion
(including $2 million of costs relating to the transaction). The
excess paid over the book value of the Class A Subordinate Voting
Shares repurchased of $655 million was charged to retained
earnings.
4. IMPAIRMENT CHARGE
During the second quarter of 2007, the Company recorded an asset
impairment of $22 million ($14 million after tax) relating to
specific assets at a powertrain facility in the United States.
5. INVESTMENTS
At September 30, 2007, the Company held Canadian third party ABCP
with a face value of Cdn$134 million. At the dates the Company
acquired these investments they were rated R1 (High) by Dominion Bond
Rating Service, the highest credit rating issued for commercial
paper, and backed by R1 (High) rated assets, and liquidity
agreements. These investments matured during the third quarter of
2007 but, as a result of liquidity issues in the ABCP market, did not
settle on maturity. As a result, the Company has classified its ABCP
as long-term investments after initially classifying them as cash and
cash equivalents and recorded a $7 million impairment of the value of
this investment. Continuing uncertainties regarding the value of the
assets which underlie the ABCP, the amount and timing of cash flows
associated with the ABCP and the outcome of the restructuring process
could give rise to a change in the value of the Company's investment
in ABCP which would impact the Company's earnings.
6. ACQUISITIONS
(a) For the nine months ended September 30, 2007
On January 15, 2007, Magna acquired two facilities from Pressac
Investments Limited ("Pressac"). The facilities in Germany and
Italy manufacture electronic components for sale to various
customers, including Volkswagen, Mercedes and Fiat. The total
consideration for the acquisition amounted to $52 million
((euro) 40 million), consisting of $46 million paid in cash, net
of cash acquired, and $6 million of assumed debt. The excess
purchase price over the book value of assets acquired and
liabilities assumed was $29 million.
The purchase price allocations for Pressac are preliminary and
adjustments to the allocations may occur as a result of obtaining
more information regarding asset valuations. On a preliminary
basis, an allocation of the excess purchase price over the book
value of assets acquired and liabilities assumed has been made to
fixed assets and goodwill.
(b) For the nine months ended September 30, 2006
(i) CTS Fahrzeug-Dachsysteme GmbH, Bietigheim-Bissingen ("CTS")
On February 2, 2006, Magna acquired CTS, a leading
manufacturer of roof systems for the automotive industry.
CTS manufactures soft tops, hard tops and modular
retractable hard tops. In addition to Porsche, its customers
include Mercedes, Ferrari, Peugeot and General Motors. CTS
has six facilities in Europe and two facilities in North
America.
The total consideration for the acquisition of CTS amounted
to $271 million, consisting of $203 million paid in cash and
$68 million of assumed debt.
(ii) Magna Golf Club
On August 25, 2006, the Company acquired the net assets of
the Magna Golf Club located in Aurora, Ontario from Magna
Entertainment Corp. ("MEC") for total cash consideration of
$46 million. The transaction was reviewed by a Special
Committee, and approved by the independent members of
Magna's Board of Directors following the unanimous
recommendation of the Special Committee.
7. WARRANTY
The following is a continuity of the Company's warranty accruals:
2007 2006
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Balance, beginning of period $ 94 $ 96
Expense, net 3 7
Settlements (6) (5)
Acquisition 1 6
Foreign exchange and other 1 2
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Balance, March 31, 93 106
Expense, net 8 7
Settlements (7) (3)
Foreign exchange and other 9 5
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Balance, June 30, 103 115
Expense (income), net 6 (39)
Settlements (5) (9)
Foreign exchange and other 6 -
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Balance, September 30, $ 110 $ 67
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8. EMPLOYEE FUTURE BENEFIT PLANS
The Company recorded employee future benefit expenses as follows:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2007 2006 2007 2006
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Defined benefit pension
plans and other $ 4 $ 7 $ 15 $ 16
Termination and long
service arrangements 6 4 16 14
Retirement medical
benefits plan 3 4 9 9
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$ 13 $ 15 $ 40 $ 39
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9. CAPITAL STOCK
(a) Changes in the Class A Subordinate Voting Shares and Class B
Shares consist of the following (numbers of shares in the
following table are expressed in whole numbers):
Class A
Subordinate Voting Class B
------------------------- -------------------------
Number of Stated Number of Stated
shares value shares value
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Issued and outstanding
at December 31,
2006 108,787,387 $ 2,505 1,092,933 $ -
Issued under the
Incentive Stock
Option Plan 74,082 5
Issued under the
Dividend Reinvestment
Plan 1,381 -
Release of restricted
stock (notes 9(b), 10) - 3
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Issued and outstanding
at March 31, 2007 108,862,850 2,513
Issued under the
Incentive Stock
Option Plan 288,644 22
Issued under Stock
Appreciation Rights
(note 9(c)) 301,364 11
Issued under the
Dividend Reinvestment
Plan 1,466 -
Release of restricted
stock (notes 9(b), 10) - 6
Repurchase of Class
A Subordinate
Voting Shares (note 9(b)) - (7)
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Issued and outstanding
at June 30, 2007 109,454,324 2,545
Issued for cash
under the Arrangement
(note 3) 20,000,000 1,531
Repurchase and
Cancellation of
Class A Subordinate
Voting and Class
B Shares (note 3) (11,902,654) (280) (217,400) -
Conversion of Class
B Shares into
Class A Subordinate
Voting Shares
(note 3) 148,704 - (148,704) -
Issued under the
Incentive Stock
Option Plan 157,844 6
Issued under the
Dividend Reinvestment
Plan 2,004 -
Release of restricted
stock (notes 9(b), 10) - 1
Repurchase of Class
A Subordinate
Voting Shares
(note 9(b)) - (3)
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Issued and outstanding
at September 30,
2007 117,860,222 $ 3,800 726,829 $ -
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(b) At September 30, 2007, 893,544 (December 31,2006 - 958,688) Magna
Class A Subordinate Voting Shares, which were purchased by the
Company at a cumulative cost of $57 million (December 31, 2006 -
$57 million), have been awarded on a restricted basis to certain
executives. The stock that has not been released to the
executives is reflected as a reduction in the stated value of the
Company's Class A Subordinate Voting Shares.
(c) On June 29, 2007, following approval by the Company's Corporate
Governance and Compensation Committee and in accordance with the
Amended and Restated Incentive Stock Option Plan, the Company
granted stock appreciation rights ("SARs") to the Company's
Chairman, Mr. Stronach, and an associated company, Stronach &
Co., in respect of 648,475 previously granted and unexercised
stock options.
Simultaneously, all such SARs were exercised and all of the
previously granted and unexercised stock options were surrendered
and cancelled. On exercise of the SARs, Stronach & Co. and Mr.
Stronach received 301,364 Magna Class A Subordinate Voting
Shares, representing an amount equal to the difference between
the aggregate fair market value of the shares covered by the
surrendered options and the aggregate exercise price of such
surrendered options. Fair market value was determined based on
the weighted average closing price of the Company's Class A
Subordinate Voting Shares on the Toronto Stock Exchange or the
New York Stock Exchange (based on the surrendered options'
currency) for the five consecutive trading days ending on the
trading day immediately prior to the date of exercise.
(d) The following table presents the maximum number of shares that
would be outstanding if all the dilutive instruments outstanding
at November 2, 2007 were exercised or converted:
Class A Subordinate Voting and Class B Shares 118,587,051
Subordinated Debentures(i) 1,096,589
Stock options(ii) 2,945,443
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122,629,083
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(i) The above amounts include shares issuable if the holders of
the 6.5% Convertible Subordinated Debentures exercise their
conversion option but exclude Class A Subordinate Voting
Shares issuable, only at the Company's option, to settle
interest and principal related to the 6.5% Convertible
Subordinated Debentures. The number of Class A Subordinate
Voting Shares issuable at the Company's option is dependent
on the trading price of the Class A Subordinate Voting
Shares at the time the Company elects to settle the 6.5%
Convertible Subordinated Debenture interest and principal
with shares.
The above amounts also exclude Class A Subordinate Voting
Shares issuable, only at the Company's option, to settle the
7.08% Subordinated Debentures on redemption or maturity. The
number of shares issuable is dependent on the trading price
of Class A Subordinate Voting Shares at redemption or
maturity of the 7.08% Subordinated Debentures.
(ii) Options to purchase Class A Subordinate Voting Shares are
exercisable by the holder in accordance with the vesting
provisions and upon payment of the exercise price as may be
determined from time to time pursuant to the Company's stock
option plans.
10. CONTRIBUTED SURPLUS
Contributed surplus consists of accumulated stock option compensation
expense less the fair value of options at the grant date that have
been exercised and reclassified to share capital, the accumulated
restricted stock compensation expense, and the value of the holders'
conversion option on the 6.5% Convertible Subordinated Debentures.
The following is a continuity schedule of contributed surplus:
2007 2006
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Stock-based compensation
Balance, beginning of period $ 62 $ 62
Stock-based compensation expense 2 2
Exercise of options (1) (3)
Release of restricted stock (note 9(b)) (3) -
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Balance, March 31, 60 61
Stock-based compensation expense 14 3
Exercise of options (3) (3)
Exercise of stock appreciation rights (note 9(c)) (11) -
Release of restricted stock (note 9(b)) (6) -
---------------------------------------------------------------------
Balance, June 30, 54 61
Stock-based compensation expense 2 4
Release of restricted stock (note 9(b)) (1) -
---------------------------------------------------------------------
Balance, September 30, 55 65
Holders' conversion option 3 3
---------------------------------------------------------------------
$ 58 $ 68
---------------------------------------------------------------------
---------------------------------------------------------------------
11. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following is a continuity schedule of accumulated other
comprehensive income:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Accumulated net unrealized
gains on translation of
net investment in
foreign operations
Balance, beginning
of period $ 1,115 $ 846 $ 814 $ 621
Repurchase of shares
(note 3) (156) - (156) -
Reclassification of gain
on translation of net
investment in foreign
operations to net income (7) - (7) -
Net unrealized gains
(losses) on translation
of net investment in
foreign operations 315 (9) 616 216
-------------------------------------------------------------------------
Balance, end of period 1,267 837 1,267 837
-------------------------------------------------------------------------
Accumulated net unrealized
gain on cash flow hedges
Balance, beginning
of period 1 - - -
Adjustment for change
in accounting
policy (note 2) - - (3) -
Net unrealized losses
on cash flow hedges(i) (6) - (6) -
Reclassifications of
net losses (gains) on
cash flow hedges to
net income(ii) (1) - 3 -
-------------------------------------------------------------------------
Balance, end of period (6) - (6) -
-------------------------------------------------------------------------
Total accumulated other
comprehensive income $ 1,261 $ 837 $ 1,261 $ 837
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) Net of income tax benefit of $2 million for the three and nine
months ended September 30, 2007.
(ii) Net of income tax benefit of $1 million for the three months
ended September 30, 2007 and income tax expense of $1 million for
the nine months ended September 30, 2007.
The amount of other comprehensive income that is expected to be
reclassified to net income over the next 12 months is $2 million (net
of income taxes of $1 million).
12. STOCK BASED COMPENSATION
(a) The following is a continuity of options outstanding (number of
options in the table below are expressed in whole numbers):
2007 2006
------------------------------ ------------------------------
Options outstanding Options outstanding
------------------- -------------------
Options Options
Exercise exercis- Exercise exercis
Options price(i) able Options price(i) able
# Cdn$ # # Cdn$ #
-------------------------------------------------------------------------
Beginning
of year 4,087,249 77.45 3,811,336 4,600,039 75.46 4,116,104
Granted - - - 115,000 87.80 -
Exercised (74,082) 63.21 (74,082) (166,209) 58.32 (166,209)
Vested - - 55,443 - - 80,100
Cancelled (7,306) 73.64 (4,400) (17,001) 93.35 (12,059)
-------------------------------------------------------------------------
March 31 4,005,861 77.72 3,788,297 4,531,829 76.33 4,017,936
Granted 40,000 88.87 - - - -
Exercised (590,008) 64.08 (590,008 (140,535) 62.92 (140,535)
Vested - - 29,000 - - 8,138
Cancelled (366,686) 69.78 (361,641) (6,862) 73.11 (2,658)
-------------------------------------------------------------------------
June 30 3,089,167 81.41 2,865,648 4,384,432 76.76 3,882,881
Granted 15,000 95.96 - - - -
Exercised (157,844) 59.99 (157,844) (10,137) 65.55 (10,137)
Vested - - 3,880 - - 107,004
Cancelled (880) 71.71 - (15,198) 107.83 (15,198)
-------------------------------------------------------------------------
September
30 2,945,443 82.64 2,711,684 4,359,097 76.68 3,964,550
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) The exercise price noted above represents the weighted
average exercise price in Canadian dollars.
(b) The fair value of stock options is estimated at the date of grant
using the Black Scholes option pricing model. The weighted
average assumptions used in measuring the fair value of stock
options granted or modified, during the three-month and nine-
month periods ended September 30, 2007 and 2006 are as follows:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Risk free interest rate 4.25% - 4.33% 3.99%
Expected dividend yield 1.51% - 1.14% 2.05%
Expected volatility 22% - 22% 23%
Expected time
until exercise 4 years - 4 years 4 years
-------------------------------------------------------------------------
Weighted average fair value
of options granted or
modified in period (Cdn$) $ 19.89 - $ 19.50 $ 14.89
-------------------------------------------------------------------------
Compensation expense recorded
in selling, general and
administrative expenses $ - $ 1 $ 2 $ 4
-------------------------------------------------------------------------
(c) During the three-month period ended September 30, 2007,
$3 million (2006 - $3 million) was charged to compensation
expense related to restricted stock arrangements. At
September 30, 2007, unamortized compensation expense related to
the restricted stock arrangements was $36 million (December 31,
2006 - $42 million) and has been presented as a reduction of
shareholders' equity.
13. SEGMENTED INFORMATION
Three months ended
September 30, 2007
----------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 1,639 $ 1,570 $ 1,141
United States 1,368 1,324 1,010
Mexico 409 368 371
Eliminations (143) - -
---------------------------------------------------------------------
3,273 3,262 $ 165 2,522
Europe
Euroland 2,321 2,282 1,068
Great Britain 292 292 88
Other European
countries 161 131 129
Eliminations (50) - -
---------------------------------------------------------------------
2,724 2,705 84 1,285
Rest of World 123 107 2 142
Corporate and Other (43) 3 (3) 254
---------------------------------------------------------------------
Total reportable
segments $ 6,077 $ 6,077 $ 248 4,203
Current assets 9,024
Investments, goodwill
and other assets 2,286
---------------------------------------------------------------------
Consolidated
total assets $ 15,513
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended
September 30, 2006
----------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 1,444 $ 1,384 $ 1,123
United States 1,187 1,145 1,117
Mexico 374 334 349
Eliminations (134) - -
---------------------------------------------------------------------
2,871 2,863 $ 67 2,589
Europe
Euroland 2,203 2,168 1,030
Great Britain 203 203 84
Other European
countries 148 118 107
Eliminations (44) - -
---------------------------------------------------------------------
2,510 2,489 68 1,221
Rest of World 84 72 (4) 111
Corporate and Other (41) - 18 179
---------------------------------------------------------------------
Total reportable
segments $ 5,424 $ 5,424 $ 149 4,100
Current assets 7,407
Investments, goodwill
and other assets 1,975
---------------------------------------------------------------------
Consolidated
total assets $ 13,482
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine months ended
September 30, 2007
----------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 5,150 $ 4,947 $ 1,141 $ 4,833
United States 4,432 4,309 1,010 4,233
Mexico 1,138 1,006 371 1,203
Eliminations (417) - - (408)
---------------------------------------------------------------------
10,303 10,262 $ 573 2,522
Europe
Euroland 7,399 7,275 1,068
Great Britain 882 881 88
Other European
countries 567 497 129
Eliminations (134) - -
---------------------------------------------------------------------
8,714 8,653 300 1,285
Rest of World 352 309 12 142
Corporate and Other (138) 7 23 254
---------------------------------------------------------------------
Total reportable
segments $ 19,231 $ 19,231 $ 908 4,203
Current assets 9,024
Investments, goodwill
and other assets 2,286
---------------------------------------------------------------------
Consolidated
total assets $ 15,513
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine months ended
September 30, 2006
----------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 4,833 $ 4,647 $ 1,123
United States 4,233 4,083 1,117
Mexico 1,203 1,098 349
Eliminations (408) - -
---------------------------------------------------------------------
9,861 9,828 $ 535 2,589
Europe
Euroland 6,855 6,740 1,030
Great Britain 684 682 84
Other European
countries 457 353 107
Eliminations (142) - -
---------------------------------------------------------------------
7,854 7,775 161 1,221
Rest of World 240 209 (4) 111
Corporate and Other (143) - 50 179
---------------------------------------------------------------------
Total reportable
segments $ 17,812 $ 17,812 $ 742 4,100
Current assets 7,407
Investments, goodwill
and other assets 1,975
---------------------------------------------------------------------
Consolidated
total assets $ 13,482
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) EBIT represents operating income before interest income or expense.
14. SUBSEQUENT EVENTS
Subject to approval by the Toronto Stock Exchange ("TSX") and the New
York Stock Exchange ("NYSE"), our Board of Directors approved the
purchase for cancellation and/or for purposes of our long-term
retention (restricted stock) and restricted stock unit programs, up
to 9,500,000 of the Company's Class A Subordinate Voting Shares,
representing approximately 9.8% of its public float of Class A
Subordinate Voting Shares, pursuant to a normal course issuer bid.
The normal course issuer bid is expected to commence on or about
November 12, 2007 and will terminate one year later. All purchases of
Class A Subordinate Voting Shares will be made at the market price at
the time of purchase in accordance with the rules and policies of the
TSX and the NYSE, including Rule 10b-18 under the U.S. Securities
Exchange Act of 1934.
15. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
to the current period's method of presentation.
Source: Magna International Inc.
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