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Tesma International Inc.
Annual Report 2003
TESMA Measuring Our Success
Tesma At A Glance
2003 Operating Highlights Major Customers
Tesma Expanded customer base to include General Motors
Engine Hyundai, Fiat and (including Fiat, Saab, Isuzu)
Technologies the PSA Group
Ford
Expanded product line to include more (including Volvo, Mazda,
value-added Jaguar)
assemblies and modules - Hyundai V6
engine front cover DaimlerChrysler
module, General Motors' (GM) 3.9L (including Mitsubishi,
engine front cover Hyundai)
module
Honda
Established two new entities in Italy
on one site to produce Toyota
oil and water pump assemblies and
front end accessory drive Renault-Nissan-Samsung
components for European customers
Hitachi
Intensified Six Sigma continuous
improvement activities
Established a plant in China to
manufacture automatic belt
tensioners for Volkswagen
Tesma Awarded hub and housing business on General Motors
Transmission new GM
Technologies 6-speed rear wheel drive transmission Ford
(including Mazda)
Launched various new products,
including continuously DaimlerChrysler
variable transmission (CVT) cylinders
for ZF in Europe and Allison Transmission
aluminium clutch pistons for GM
ZF
Expanded research and development
(R&D) capabilities Renault-Nissan-Samsung
to include high-speed spin burst
testing and multi-channel Magna Steyr
torque and axial load fatigue testing
Launched transfer case shafts and
hubs for a key
program for Magna Steyr
Launched transmission centre support
housing for GM
Realized operational efficiency and
capacity utilization
improvements through Six Sigma
initiatives
Announced agreement to acquire Davis
Industries, Inc.
(Davis), a U.S.-based powertrain
supplier (completed
January 2, 2004)
Tesma Fuel Focused R&D initiatives on the General Motors
Technologies development of low (including Fiat)
permeation capless filler systems,
filler pipes and fuel tank Ford
assemblies to meet Low Emission (including Volvo)
Vehicle (LEV II)
Legislation and Partial Zero Emission DaimlerChrysler
Vehicle (PZEV)
legislation Volkswagen Group
Continued Six Sigma initiatives, BMW
LEAN/Synchronous
manufacturing efforts and VA/VE Audi
design improvements
to increase product functionality and
reduce costs
Launched several fuel filler pipe
programs in Europe and
North America for Ford and
DaimlerChrysler
Launched the Volkswagen PQ34 PZEV
stainless steel
fuel tank in Europe
Product Offerings 2004 Goals and Strategy
Front End Accessory Drive Systems Capitalize on Tesma's component
manufacturing
Accessory and Timing Drive expertise/capabilities and further
Tensioners integrate to value-added
assemblies and modules
Steel, Phenolic and Aluminium
Pulleys Expand customer base in key markets
for our engine front
Idler Assemblies cover modules, cooling and
lubrication systems
Engine Front Cover Modules
Continue to develop full-service
Engine Oil Pumps capabilities by further
expanding our design, development,
Water Pumps testing and validation
capabilities at both the component
Cooling Management Systems and systems levels
Overrunning Alternator Decouplers Continue to expand benchmarking
capabilities for cooling,
Cam Covers lubrication and engine systems
products
Variable Camshaft Phasing Systems
Successfully launch our first oil
Engine Oil Pan Assemblies pumps and pulleys from
our operations in Italy
Engine Balance Shaft Assemblies
Continue to develop unique and
Collapsible Drive Shaft Assemblies innovative products,
technologies and materials
Rocker Covers
Successfully launch significant
business at our
South Korean operations, including
our first engine
front cover module for Hyundai
Automatic Transmission Clutch Successfully integrate the Davis
Housings and Shaft Assemblies operations
Flow-Formed Clutch Housings Expand engineering and testing
capabilities to include
Cam Die-Formed Transmission Shells complete clutch pack assemblies
Torque Converter Damper Assemblies Continue to pursue and expand
content in the precision
Oil Pump Assemblies aluminium transmission die-cast
components area
Die-Formed Oil Pan Assemblies
Continue to pursue value-added
Aluminium Die-Cast and Machined Case sub-assemblies for
Extensions various transmission applications
and Clutch Housings
Expand our transmission oil pump
Servo Piston and Accumulator assemblies to include
Assemblies vane pump technology and unique
variable flow
Roller Die-Formed Drive Hubs and technology
Housings
Expand transfer case component and
Fineblanked Products, Separator sub-assembly
Plates and Backing Plates capability
Flexplates Expand customer base into
non-traditional OEM market
Reaction and Input Shells
CVT - Pistons, Plungers and Clutch
Housings
Friction Clutch Pack Assemblies
Transfer Case Output Shafts and
Flanges
Torque Converter Stator Shafts
Fuel Caps Provide leadership in the
development and market
Fuel Filler Inlets and Valves introduction of innovative fuel
system solutions and
Capless Filler Systems alternative material applications
Steel Fuel Filler Pipes Expand our current product portfolio
in Europe and
Steel Fuel Tank Assemblies North America
Vent, Fill and Spud Tubes Provide customers with improved fuel
system permeation
Fuel Sender Units and corrosion performance and
reduced waste through
improved recyclability
Successfully launch the JR fuel tank
and LX fuel filler pipe
programs for DaimlerChrysler in
North America
Continue with the successful ramp-up
of Ford's global C1
fuel filler pipe program in our
Austrian facility
Profile
Tesma International Inc. (Tesma or the Company) designs, engineers, tests and
manufactures technologically-advanced engine, transmission and fuel components,
modules and systems for the global automotive industry. Tesma employs over
5,500 people in 28 manufacturing facilities (subsequent to the Davis
Industries, Inc. acquisition) in North and South America, Europe and Asia and
five focused tooling, design and R&D centres supporting our three principal
product technology groups: Tesma Engine Technologies, Tesma Transmission
Technologies and Tesma Fuel Technologies. Tesma ships its products to Original
Equipment Manufacturers (OEMs) on six continents.
Tesma's Class A Subordinate Voting Shares trade on the Toronto Stock Exchange
under the symbol TSM. A and the NASDAQ Stock Market under the symbol TSMA.
Forward-Looking Statements: This Annual Report may contain "forward-looking
statements" within the meaning of applicable securities legislation. Such
statements involve certain risks, assumptions, uncertainties and other factors
(as described in Tesma's Annual Information Form, Form 40-F and other public
filings) which may cause Tesma's actual future results or performance to differ
materially from those expressed or implied herein. Tesma expressly disclaims any
intention, and undertakes no obligation, to update or revise any forward-looking
statements to reflect subsequent information, events, results, circumstances
or otherwise.
FOLD - OUT Tesma At A Glance
02 Results
03 Global Performance
03 Content Per Vehicle
04 Chairman's Message
05 Letter to Shareholders
09 Glossary
10 Components, Modules and Systems
13 Tesma Engine Technologies
17 Tesma Transmission Technologies
21 Tesma Fuel Technologies
22 Policies
22 Corporate Constitution
22 Employee's Charter
23 Corporate Governance
24 Review
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Customers. Employees. Shareholders.
They all have expectations.
And Tesma delivers results.
We're an industry leader in quality.
That's what our customers tell us.
They assess our performance every day.
We're a great place to work.
That's what employees tell us - in opinion surveys
and through long-term commitments to our team.
We build shareholder value.
That's what financial metrics tell us.
We're a leader among our peers.
But no one expects more of Tesma
than we do of ourselves.
That's how we measure our success.
The details are inside.
TESMA 1
Results
Financial Highlights
December 31
2003 2002 % change
(U.S. dollars in millions, except per share and shares
amounts)
Results for the year ended
Sales $ 1,098.6 $ 925.9 +19%
Income before income taxes $ 110.0 $ 82.9 +33%
Net income $ 74.1 $ 56.0 +32%
Operating cash flow $ 143.8 $ 112.6 +28%
Capital expenditures $ 61.2 $ 68.9 -11%
Earnings per Class A Subordinate
Voting Share or Class B Share
Basic $ 2.29 $ 1.82 +26%
Diluted $ 2.28 $ 1.80 +27%
Cash dividends paid per Class A Subordinate
Voting Share or Class B Share (CDN $) $ 0.75 $ 0.64
Average number of Class A Subordinate
Voting Shares and Class B Shares outstanding
Basic 32.3 30.7 +5%
Diluted 32.5 31.1 +5%
Year end position, as at
Cash (net of bank indebtedness) $ 122.5 $ 89.0 +38%
Total assets $ 839.0 $ 656.8 +28%
Long-term debt (including current portion) $ 66.8 $ 49.4 +35%
Shareholders' equity $ 549.3 $ 410.2 +34%
Book Value per Class A Subordinate
Voting Share or Class B Share $ 16.92 $ 12.66 +34%
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2 TESMA
Global Performance
NORTH AMERICA EUROPE OTHER
December 31 December 31 December 31
Operating Segment 2003 2002 2003 2002 2003 2002
(U.S. dollars in millions, except
facilities and employees)
Sales $ 856.0 $ 725.5 $ 235.6 $ 180.6 $ 28.8 $ 33.8
Income before income taxes $ 97.5 $ 87.5 $ 18.3 $ (6.1 ) $ (5.8 ) $ 1.5
Capital assets $ 206.1 $ 197.8 $ 65.2 $ 49.1 $ 32.4 $ 26.2
Manufacturing facilities 15 15 6 5 4 3
Employees 3,600 3,500 1,100 1,200 300 200
Content Per Vehicle
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TESMA 3
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MANFRED GINGL
Chairman & Chief Executive Officer
Chairman's Message
Tesma's success is very much a measure of our corporate culture and structure,
both of which have their roots in Magna. Why have we placed such an emphasis on
these two elements of how we do business? The answer is quite simple. It's not
enough to have the right structure; a great company needs the right people, too.
Our greatest asset is outstanding and entrepreneurial individuals. We hold them
accountable, we challenge and empower them - and we reward them through employee
profit participation and share ownership programs. We provide them with training
and education programs, as well as the opportunity to use what they have
learned. Financial compensation is an important incentive - but so is the sense
of pride and ownership that comes from working for, and contributing to, the
success of Tesma. And so is "having fun along the way"!
Our manufacturing divisions operate as individual profit centres with dedicated
production, finance, human resources and engineering teams. These teams can
quickly respond to issues impacting operations, as well as investing in
resources to develop opportunities for the future. In a centralized
organization, by the time information reaches the top and filters back again,
it's often too late.
While we work in a decentralized environment, we still try to capitalize on
Tesma's brand identity and purchasing power, as well as its expertise in
treasury, finance, information technology, tax and sales by maintaining certain
centralized corporate office functions. This structure allows each general
manager to focus on his division's performance in quality, delivery and
profitability. To ensure consistency in our human resources initiatives and
policies within all divisions, Tesma's HR department oversees the implementation
and compliance of these initiatives on an ongoing basis.
I believe in our culture and our structure. It is the unique combination of
these elements at Tesma that will allow us to continue to drive forward, benefit
from trends in the automotive powertrain area and provide further growth and
success.
/s/ MANFRED GINGL
MANFRED GINGL
CHAIRMAN & CHIEF EXECUTIVE OFFICER
4 TESMA
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ANTHONY E. DOBRANOWSKI
President & Chief Financial Officer
Letter to Shareholders
We had another great year. We surpassed our competitors in key performance
measures such as return on funds employed, return on assets and return on
equity. We increased sales 19% over 2002 and continued to grow our content per
vehicle, which rose from U.S. $36.87 to U.S. $43.95 in North America and from
14.90 to 16.28 in Europe. Our North American sales grew 18% to U.S. $856 million
despite lower vehicle production volumes. Overall, our bottom line increased to
U.S. $74.1 million from U.S. $56.0 million a year ago.
TESMA 5
Why does Tesma remain profitable in the current tough market?
Many factors play a part. I'll point out just a few. First, we have people with
the product development and manufacturing skills needed to wring savings from
our processes, make continuous improvements, enhance quality and productivity
and provide strong technical expertise and service to our customers.
We also have great discipline in the quoting process. We won't quote on jobs
just to fill floor space and increase sales. And we are intensifying our focus
on initiatives like better supplier management and offshore purchasing.
Geographic diversification allows us to increase our opportunities while
mitigating our risks. From a product standpoint, we have expertise on a part of
the vehicle that offers relatively great scope for proprietary products and
technical proficiency, which we have developed through innovative solutions.
How are your customer relationships evolving?
We have solid and stable relationships with the majority of the world's major
vehicle manufacturers. Our operations are efficient and world-class, with the
right people and processes in place to help our customers. We are always looking
for ways to exceed their expectations. Our industry faces price and margin
pressures from OEMs, which means Tesma must make products better, faster and at
lower cost than our competitors - and we do.
Our three technology groups have grown by taking single products and building on
them. Tesma Engine Technologies, which began by manufacturing pulleys and front
end accessory drive components, now makes entire front cover modules and is
expanding down the engine. Tesma Transmission Technologies started with a few
components and today offers a variety of transmission modules and assemblies.
Tesma Fuel Technologies originally manufactured only caps, but has evolved to
sell complete filler pipes and tanks as well. That's our organic growth curve.
Our customers are buying more and more systems and modules, rather than
individual products - and they are relying on suppliers for engineering and
development. In 2003, we derived approximately 80% of our sales from complete,
value-added modules and assemblies, up from 75% last year. These types of
products also represented about 80% of the business awarded to us during the
year.
Our plan is to increase our North American market presence beyond the "Big
Three" and to derive 15% of our sales from New Domestic manufacturers by 2006.
The acquisition of Davis in early January 2004 moves us closer to this goal.
Davis, a U.S.-based automotive parts manufacturer and supplier with annual sales
of U.S. $129 million in their recently completed fiscal year, focuses on stamped
powertrain components and assemblies that complement our existing product
offerings.
Davis gives us, for the first time, a presence close to the assembly facilities
of the OEMs in the southern U.S. Just as importantly, the acquisition broadens
our customer relationships with non-traditional customers, as a high percentage
of Davis' sales are to New Domestics. We expect Davis to be immediately
accretive and to add more than U.S. $0.10 per share annually to our earnings
in 2004.
80%
In 2003, we derived approximately 80% of our sales from complete, value-added
modules and assemblies, up from 75% last year.
6 TESMA
What are you doing to diversify geographically and why?
From a very sound base in North America, we have set our sights on obtaining
significant business in Europe and Asia. Our approach is to start small and
develop the critical mass required to meet our customers' needs, while achieving
good returns and strategic leverage for Tesma.
Global presence is important for the simple reason that our customers are
demanding global capability from their suppliers. They expect us to offer global
manufacturing, testing and product development, and technical and sales
representation. With this in mind, we made a number of moves in 2003.
From a manufacturing perspective, we opened our first Italian operations. We'll
use these operations to migrate to Europe some pulley business that is currently
exported from Canada and will supply Fiat with oil and water pumps for the
European market. We expanded our South Korean facilities and established our
first plant in China. It will manufacture automatic belt tensioners for
Volkswagen to supply the Chinese market. We are building an infrastructure and a
team with potential to broaden our manufacturing capabilities and capitalize on
future business opportunities in China.
In terms of testing and product development, we added resources in Korea and
began building our capabilities in China. We also improved our ability to
conduct testing and product development in Europe. And we increased our
technical and sales representation in Japan.
Are more acquisitions likely?
There are three key elements that influence our interest in acquisitions:
products, processes and geographic presence. We are reviewing our products to
determine whether we should make any changes in our focus due to the emergence
of new technologies or for other reasons. We already use more than 50 processes,
but there are others, such as those used to manufacture powdered metal and
magnesium components, which could strengthen our portfolio. Our decisions with
respect to geographic location are a balance between what customers want us to
do, what our real needs are and whether we have a viable business model. For
example, we are looking to create critical mass in Europe and continue to review
acquisition opportunities on that continent.
In evaluating acquisition targets, we try to strike a balance between the price
we are willing to pay for a "strategic" versus a "good fit" acquisition; our
ability to support the purchase price and future growth requirements; the
implementation and integration risks that are inherent in all transactions; and
the impact on our shareholders. Other factors include "cultural" and employee
fit and reliance on particular customers.
We continue to look for attractive targets, but we will only make deals that
make sense for Tesma. Acquisitions are not the only way to expand our business.
We are launching new products and generating solid internal growth. For
instance, in 2003 we booked new business that will represent over
U.S. $270 million in annual sales by the time these programs reach full
production volumes in 2007. Our strong balance sheet and cash reserves give us
the flexibility to make the best choices for Tesma.
U.S. $270M
In 2003, we booked new business that will represent over U.S. $270 million in
annual sales at full production volumes.
TESMA 7
What is the market potential - and how competitive is Tesma?
While outsourcing is an accelerating trend among OEMs, the powertrain sector is
one of the least exploited segments and offers the best potential. In spite of
Tesma's excellent growth record, we currently represent just 2.3% of the
estimated U.S. $46 billion annual global powertrain market for Tesma's product
portfolio.
Certainly foreign exchange is a competitive challenge for any Canadian exporter,
as the Canadian dollar appreciated by 12% in 2003 against the U.S. dollar. Our
Canadian counterparts are in the same boat as Tesma, but we also have
competitors in the United States. Up to now, we have managed the impact of
foreign exchange; if the dollar appreciates beyond a certain point we'll feel
the pain of converting Canadian costs into U.S. dollars for quoting purposes.
Still, it's not the end of the world for us.
We do have the flexibility to set up manufacturing facilities locally if
appropriate. The Davis acquisition expands our presence in the southern U.S. and
improves this flexibility.
Also, one needs to consider where sales are generated. It's not just a question
of the differential between the Canadian and U.S. dollars. Our sales are
denominated in yen, in euros and in various other currencies. We may lose on one
transaction, but benefit on another.
Other aspects of competitiveness include the immediate pressures for customer
givebacks. This means we must review and adjust the resources within our
facilities to make the most of our manufacturing processes. We're doing an
effective job of that.
The question of competitiveness underscores why it's important to diversify our
customer base and geographic presence. We don't want to be overly reliant on any
single source of business.
How will Tesma measure up in 2004 and beyond?
From 2003 to 2006, vehicle production volumes are expected to grow from
15.9 million units to 16.5 million units in North America and from 16.5 million
units to 17.3 million units in Europe. Like the economy and currency
fluctuations, industry volumes are among the uncontrollable factors that affect
our business. We are determined to optimize Tesma's performance, whatever the
conditions.
We anticipate that Tesma's annual sales will increase 12 to 13%, on average,
over the next three years. We will enhance our performance metrics through sales
growth and rigorous focus on costs and production efficiencies. During nearly a
decade as a public company, Tesma has focused on the "Big Three" OEMs. In 2004
and beyond, we will continue to grow this business while highlighting
opportunities with other OEMs in North America, Europe and Asia, including the
New Domestic OEMs.
I am confident that Tesma will measure up well over the long term, due largely
to our strong relationships with customers, employees and shareholders. I'd like
to express my personal thanks for their support in 2003.
Tesma's ultimate vision is to be the world's leading Tier 1 supplier of advanced
powertrain modules and systems. By designing, testing and building
highly-engineered and proprietary products for global markets and a growing
customer base, we are well positioned to reach our goal.
/s/ ANTHONY E. DOBRANOWSKI
ANTHONY E. DOBRANOWSKI
PRESIDENT & CHIEF FINANCIAL OFFICER
2.3%
We currently represent just 2.3% of the estimated U.S. $46 billion annual global
powertrain market for Tesma's product portfolio.
8 TESMA
Glossary
"Big 3" or Traditional OEMs
Refers to the North American operations of General Motors, Ford Motor Company
and DaimlerChrysler
Content Per Vehicle (North America or Europe)
The average dollar (or euro) value of parts produced by Tesma included in each
vehicle assembled in North America (or Europe) respectively. It is calculated as
Tesma's total product sales to customers in North America or Europe divided by
the number of vehicles assembled in each of these markets.
Continuously Variable Transmission (CVT)
A transmission that continuously varies the gear ratios between the engine input
and torque output. A CVT allows optimum revolutions per minute (RPM), for
maximized fuel economy, engine efficiency, low emissions and improved
performance. A manual or automatic transmission has a predefined set of gear
ratios, which does not allow for optimal performance.
DaimlerChrysler Group
Includes the automotive companies Chrysler, Mercedes-Benz, Hyundai, MCC (Smart)
and Mitsubishi
European Vehicle Production
Vehicles assembled in Western Europe, which includes Austria, Belgium, Finland,
France, Germany, Italy, the Netherlands, Norway, Portugal, Spain, Sweden and the
United Kingdom
Ford Motor Company
Includes the automotive companies Ford, Volvo, Jaguar, Aston Martin, Mazda and
Land Rover
General Motors Group
Includes the automotive companies General Motors, Hummer, Saab, Saturn, Fiat,
Isuzu, Subaru (Fuji Heavy Industries), Holden, Opel, Vauxhall and Daewoo
Global Six
The six largest automotive OEMs: General Motors, Ford Motor Company,
DaimlerChrysler, Toyota, Volkswagen Group and Renault-Nissan-Samsung
Low Emission Vehicle (Level 2) LEV II
LEV I was the original Low Emission Vehicle specification for conventional gas
fueled vehicles and LEV II was established with more stringent specifications
for emissions. It was initiated by the California Air Resources Board (CARB).
Modules and Systems
A series of components or sub-assemblies that are integrated into a package.
North American New Domestic OEMs
OEMs that assemble vehicles, engines or transmissions in North America other
than the "Big 3" - examples are: Toyota, Honda, Renault-Nissan Samsung and BMW
North American Non-traditional OEMs
OEMs that sell vehicles in North America other than the "Big 3" - examples are:
Toyota, Honda and KIA
North American Vehicle Production
The number of light vehicles assembled in the United States, Canada and Mexico
OEM Outsourcing
The procuring of components, modules and systems used in the manufacture of
motor vehicles to outside suppliers or manufacturers in order to cut costs.
Original Equipment Manufacturers (OEMs)
Assemblers of complete vehicles, including their engine and transmission
operations. OEMs provide the original product design and are directly
responsible for manufacturing and modifying the products, making them
commercially available and providing warranty coverage.
Partial Zero Emission Vehicle (PZEV)
A lower emission vehicle (a more stringent regulation than LEV II) which does
not meet full-zero emission specifications for gas fueled vehicles as set out by
CARB regulations.
Powertrain
An engine and transmission combined; can also include the driveshaft and drive
axle
Production Part Approval Process (PPAP)
An OEM process where quality and specification monitoring is done prior to the
part entering the commercial manufacturing stage.
Six Sigma
A disciplined and data driven approach to eliminate waste and reduce variation
in any process using the Breakthrough Methodology which is define, measure,
analyze, improve and control.
Tier 1 Supplier
A company that sells their products directly to the Original Equipment
Manufacturer (OEM).
Volkswagen Group
Includes the automotive companies Volkswagen, Audi, Seat, Skoda and Auto-Europa
TESMA 9
Components, Modules and Systems
Tesma manufactures thousands of individual components. These products are
assembled in a variety of modules and systems for the world's leading vehicle
manufacturers. To us, the quality of each component, each module and each system
is the foundation of our success.
[PHOTO] Tesma Engine
Technologies
[PHOTO] Engine Front
Cover Module
[PHOTO] Balance Shaft
Assembly
[PHOTO] Water Pump
[PHOTO] Engine Oil Pump
[PHOTO] Water Management
(Thermostat)
Assembly
[PHOTO] Accessory and [PHOTO]
Timing Drive
Tensioner
[PHOTO] Water Pump
Pulley
[PHOTO] Engine Oil Pan
Assembly
[PHOTO] Rocker Cover
[PHOTO] Water Pump
Module
[PHOTO] Camshaft Phasing Products shown are representative parts
System only, illustrating Tesma's capabilities.
Actual parts used in this vehicle may be
different.
10 TESMA
Tesma Fuel Technologies Fuel Tank [PHOTO]
Fuel Filler Pipe [PHOTO]
Fuel Cap [PHOTO]
Universal Sender Unit [PHOTO]
Tesma Transmission Technologies Die-Cast Transmission Case Extension [PHOTO]
Flexplate [PHOTO]
Rotating Clutch Housing [PHOTO]
[PHOTO] Torque Converter Damper Assembly [PHOTO]
Centre Support [PHOTO]
Transmission Oil Pan [PHOTO]
Servo Piston Assembly [PHOTO]
Transmission Oil Pump Assembly [PHOTO]
Clutch Pack Assembly [PHOTO]
Torque Converter Cover [PHOTO]
TESMA 11
[PHOTO]
Quality is not simply about the ability to use gauges or instruments to measure
a part's performance. Quality is about process capability. It's about having
equipment in place that can accurately perform a particular function - and
people in place who can use it most effectively. Tesma stands out in quality.
That's how we measure success.
12 TESMA
[PHOTO] [PHOTO] [PHOTO]
JON ENOAE PETER VERT RANDY SCOTT
Group Vice Director of Group Controller "Tesma's philosophy is that we don't
President Group Engineering & Engine want to compete at the bottom end of the
Engine Product Development Technologies market - what we refer to in the
Technologies Engine Technologies engineering world as 'quote to print'.
Companies that do this wind up competing
on price alone. We differentiate
ourselves, first of all, by excelling in
complex design, engineering, testing,
quality and delivery. Secondly, we are
establishing ourselves as a leading
supplier of modules. In value-added
markets, few suppliers can compete with
us."
GM 3.9L V6 ENGINE
FRONT COVER MODULE
[PHOTO]
Tesma Engine Technologies
Quality Standout
Tesma is a pioneer and leader in front end accessory drive systems, tensioners
and idler assemblies. Our strategy is to combine components at the front of the
engine and ship them to our customers as modules. We have unique manufacturing
and engineering experience in every facet of the front of the engine, including
water and oil pumps, castings to make covers, pulleys, and accessory drive
systems.
Tesma Engine Technologies' sales increased 17% to U.S. $745 million in 2003 from
U.S. $639 million in 2002. Our success shows that our strategy is working.
Key awards in 2003 included the front cover module and oil pan assembly for GM's
3.9L V6 engine for its higher volume mid-size car platforms. We also won the
front cover module and flexplates for Hyundai's largest V6 engine
program - Tesma's first major award from this South Korean manufacturer. Front
covers are our primary strategic focus. Tesma is one of the few companies that
can design, develop and manufacture most of the components that make up the
front cover module. Over the next couple of years, the percentage of sales from
front cover modules in the Tesma Engine Technologies group will more than
double.
Just half a dozen years ago, Tesma made no water pumps. In 2003, we were the
largest water pump manufacturer in North America, with annual sales of about
4.5 million units. This equates to more than 30% of all engines assembled during
the year in North America. Moreover, through our Litens Automotive Partnership,
we are the largest supplier of accessory drive tensioners in the world.
17%
Sales increase in 2003.
TESMA 13
[PHOTO] [PHOTO] [PHOTO]
Our skilled and experienced people - from press
operators and tool makers to facility general
managers - embrace our focus on operational
efficiencies. We look to them to share their ideas
for manufacturing process improvements and
cost-effective solutions.
During 2003, Ford China ordered accessory drive tensioners for its 1.3L L4
engine -opening up a new geographic market for our product. We also won the oil
and water pump business for PSA's 2.2L diesel engine. While this award
represents just U.S. $7 million in sales by 2007, it is a significant order from
one of Europe's most successful vehicle manufacturers. In addition, we increased
our oil and water pump sales to Ford of Europe by launching these products for
the Lion V6 diesel engine.
Highlights for the year included major product launches. Among these were GM's
HFV6 engine front cover module, DaimlerChrysler's 5.7L LX engine water pump,
GM's GEN IV engine cam cover and balance shaft assemblies for GM's Line 4 and
Line 5 engine programs. We also began making oil pumps for the Jaguar V8 and
Lincoln LS V8 engines - shipping these pumps to plants in England and the
United States. Our launch of the water pump for Honda's Accord was the first
time a non-Japanese supplier has provided water pumps to this customer.
During the year, we completed the purchase of 55% of an Italian company with a
manufacturing facility near Naples, Italy. This provides a domestic beachhead
for our pulley business in Europe and is located close to the Fiat plants it
will initially supply. Our first water pumps for Fiat from our wholly-owned
subsidiary on the same site have been through the Production Parts Approval
Process (PPAP) and will launch in 2004. Three new oil pumps are scheduled for
launch in the next couple of years from this facility. We expect our Italian
manufacturing capabilities will enhance our penetration of the European market.
In 2003, we set up our first plant in China and it will begin manufacturing
automatic belt tensioners for Volkswagen in the first quarter of 2004. China
represents great business potential for us. We expect that our plant will become
the focal point for expanding our manufacturing and sales in the country. We
also increased our presence in Asia last year by adding significant
manufacturing space and increasing our testing and product development
capabilities in our existing facilities in South Korea.
Important product development initiatives include electric water pumps, variable
flow oil pumps, linear and rotary proportional valves and balance shaft driven
oil pumps. These products have the potential to represent important new business
for us going forward, based on attractive near-term market opportunities and
good long-term growth potential.
Tesma's test engineering staff are instrumental in designing and specifying some
of the most sophisticated test rigs, customized to the needs of each OEM and
product application.
[GRAPHIC]
Tesma's new facilities located in Italy and China
14 TESMA
[PHOTO]
TESMA 15
[PHOTO]
Tesma leads the competition in its ability to select the materials and processes
best suited to making a product from among a wide range of in-house choices. Our
diversity of materials and manufacturing processes allows us to provide the
greatest benefits in terms of cost versus function for each product application.
That's how we measure success.
16 TESMA
[PHOTO] [PHOTO] [PHOTO]
SAM BOZZO DAVE PASCOE BRIAN HOYLE
Group Vice Director of Group Controller "Many of the people who work in product
President Group Engineering & Transmission development have a manufacturing
Transmission Product Development Technologies background, because Tesma is built on
Technologies Transmission grassroots manufacturing. So when our
Technologies people are designing products they are
already thinking about the most
economical way to manufacture them. At
the end of the day, it's about taking
cost out of the equation, not about
eroding margin - while making a
technically better product that can be
sold at a lower price."
CLUTCH HOUSING
FOR MAGNA STEYR
[PHOTO]
Tesma Transmission Technologies
Greatest Benefits
In less than a decade, Tesma Transmission Technologies has progressed from a
stamper of single components to a successful supplier of value-added assemblies
and modules. When Tesma became a public company in 1995, our products
represented less than 1% of the North American outsourced transmission module
market. Today we have 4% of the total transmission pump business in North
America and 1% of the world market.
Tesma Transmission Technologies' sales increased 15% to U.S. $250 million in
2003 from U.S. $218 million in 2002.
A key to our success in 2003 was the continued ramp-up of the Ford 5R110 oil
pump; essentially, an oil pump and transmission hydraulic control unit combined.
With 66 components and required tolerances to within a few microns, this is the
most complex assembly ever launched by Tesma. In 2004, we are ramping up from
1,200 to 2,000 assemblies daily. Nearly 80,000 individual components move along
the single assembly line for this product each day.
We are gearing up our facilities by installing equipment, refining designs and
conducting tests in order to fill a number of major product launches in 2004.
For instance, we have installed large and complex presses to facilitate
production of high tolerance components in clutch pack assemblies for ZF, a Tier
1 European-based transmission design and manufacturing company.
We were recently awarded business to supply die-cast and machined components and
assemblies to GM. These parts will be used in various transmission applications
for certain of their mid-size vehicles, full-size Cadillac models and heavier
duty full-size pick-up trucks.
15%
Sales increase in 2003.
TESMA 17
[PHOTO] [PHOTO] [PHOTO]
Our technologies and facilities are second to none.
We continually invest in state-of-the-art equipment
to enhance our design, development, engineering,
testing, program management and manufacturing
capabilities.
We are also preparing to supply flow-formed clutch housings to Magna Steyr
Powertrain as part of a large multi-year contract awarded in 2003. This is
significant in terms of both volume and strategy. In the past, we have focused
primarily on automotive transmissions, but the Magna Steyr business enables us
to apply our product capabilities to the transfer case market as well.
During 2003, we enhanced our flow-forming capability. Flow-forming is a process
where precision internal splines are produced in various types of material using
chipless rotational forming techniques. This manufacturing method enables us to
make clutch housings as a single component.
Also, we were awarded business from GM based in part on our decision to add
grobing to our broad portfolio of technologies and processes. Grobing involves
the incremental forming of splines onto a stamped steel clutch housing by means
of rollers forming splines onto a mandrel. This is the first use of grobing by
any Tesma division on this type of product and it should create new
opportunities for us to win clutch housing and other business where this process
is the best application.
The acquisition of Davis in January 2004 adds three manufacturing facilities to
this technology group. Davis' main product focus is stamped powertrain
components and assemblies, which complements and broadens our current product
offerings.
Our priorities in 2004 include expanding our clutch module business for
automatic transmissions to enhance our market position. Going forward, our
product development program will focus on lightweight differentials, new methods
of power transmission from shaft-to-shaft and planetary carriers in each case
utilizing various methods of manufacturing to best serve our customers'
requirements. We are also continuing to evolve our modules and systems product
line, particularly in the oil pump and transfer case areas.
Innovative, highly-engineered, complex - the Ford 5R110 transmission oil pump
represents one of the most advanced products in the Tesma modular product
portfolio.
Ford 5R55N transmission oil pan manufactured at Davis.
18 TESMA
[PHOTO]
TESMA 19
[PHOTO]
We offer our customers much more than design and manufacturing expertise; as
important as these are. In some instances, we have test rigs with capabilities
our customers can't duplicate. They come to us for testing because we can
simulate a variety of unique operating conditions. Customers can then rewrite
performance specifications for their products using the support we provide.
That's how we measure success.
20 TESMA
[PHOTO]
PAUL MANNERS
Group Vice President "The key message is innovation. There is
Fuel Technologies no doubt that success in our business
requires us to come up with
better-functioning solutions that
involve less cost to the customer and to
Tesma. At the same time, we recognize
that people drive innovation.
Attracting, developing, maintaining and
stimulating talent is essential to our
success. Tesma hires people who can fuel
the innovation process that sets us
apart from the competition."
DAIMLERCHRYSLER JR
FUEL TANK
[PHOTO]
Tesma Fuel Technologies
We Offer More
In just a few years, Tesma Fuel Technologies has moved rapidly up the value
chain from a small parts manufacturer to a full-service fuel systems supplier.
We began by producing fuel caps for the European market and now supply caps,
fuel filler pipes and entire fuel tank assemblies to OEM customers in North
America and Europe.
A key to this evolution was our early introduction of metal filler pipes and
tanks, which reduce permeation and improve recyclability. Various U.S. states,
beginning with California, have mandated lower fuel permeation rates and
increased corrosion resistance on all vehicles. These standards take effect
beginning in 2005. Tesma Fuel Technologies continues to work with all of our
customers to develop the best technical and commercial solutions to meet these
new requirements.
We launched a variety of fuel filler pipe and metal fuel tank programs in late
2002 and 2003. Key programs include fuel filler pipes for Ford, fuel filler
tubes and a fuel tank for DaimlerChrysler and fuel tanks for Volkswagen and
Volvo. Business awarded in 2003 included fuel filler pipes for General Motors
Daewoo of South Korea - expanding our global reach into the Asian market.
Tesma Fuel Technologies' sales increased 51% to U.S. $104 million in 2003 from
U.S. $64 million in 2002.
As we look to the future, we aim to continue diversifying our existing product
portfolio by developing improved tank ventilation systems, capless refueling
systems and universal sender unit modules.
51%
Sales increase in 2003.
TESMA 21
Policies
Corporate Constitution
Tesma's Corporate Constitution includes the following principles:
Employee Equity and Profit Participation
Ten percent of Tesma's profit before tax will be allocated to employees. These
funds will be used for the purchase of Tesma shares in trust for employees and
for cash distributions to employees, recognizing length of service.
Shareholder Profit Participation
Tesma will distribute, on average, not less than 20 percent of its annual net
profit after tax to shareholders.
Management Profit Participation
To obtain long-term contractual commitment from senior management, Tesma
provides a compensation arrangement which, in addition to a base salary below
industry standards, allows for the distribution of up to six percent of its
profit before tax.
Research and Development
Tesma will allocate a minimum of 7 percent of its profit before tax for research
and development to ensure its long-term viability.
Social Responsibility
Tesma will allocate a maximum of 2 percent of its profit before tax for
charitable, cultural, educational and political purposes to support the basic
fabric of society.
Minimum Profit Performance
Management has an obligation to produce a profit. If Tesma does not generate a
minimum after-tax return of 4 percent on share capital for two consecutive
years, Tesma's Class A shareholders, voting as a class, will have the right to
elect additional directors.
Unrelated Investments
Tesma Class A and Class B shareholders, with each class voting separately, will
have the right to approve any investment in an unrelated business in the event
such investment, together with all other investments in unrelated businesses,
exceeds 20 percent of Tesma's equity.
Board of Directors
Tesma believes that outside directors provide independent counsel and
discipline. A majority of the members of Tesma's Board of Directors will be
outsiders.
Constitutional Amendments
Any change to the Corporate Constitution will require the approval of Tesma's
Class A and Class B shareholders, with each class voting separately.
Employee's Charter
Tesma is committed to an operating philosophy which is based on fairness and
concern for people. This philosophy is part of Tesma's Fair Enterprise culture
in which employees and management share in the responsibility to ensure the
success of the Company.
It includes these principles:
Job Security
Being competitive by making a better product for a better price is the best way
to enhance job security. Tesma is committed to working together with its
employees to help protect their job security.
To assist employees, Tesma will provide:
Ί
Ί Job Counselling
Ί
Ί Training
Ί
Ί Employee Assistance Programs
A Safe and Healthful Workplace
Tesma strives to provide employees with a working environment which is safe and
healthful.
Fair Treatment
Tesma offers equal opportunities based on an individual's qualifications and
performance, free from discrimination or favouritism.
22 TESMA
Competitive Wages and Benefits
Tesma will provide employees with information which will enable them to compare
their total compensation, including total wages and total benefits, with those
earned by employees of competitors, as well as with other plants in the
community. If total compensation is found not to be competitive, then wages will
be adjusted.
Employee Equity and Profit Participation
Tesma believes that every employee should share in the financial success of the
Company.
Communication and Information
Through regular monthly meetings between management and employees and through
publications, Tesma will provide employees with information so they will know
what is going on in the Company and within the industry.
The Hotline
Should an employee have a problem, or feel the above principles are not being
met, Tesma encourages such employees to contact the Hotline to register their
complaints. Employees do not have to give their name, but if they do, it will be
held in strict confidence. Hotline Investigators will answer the call. The
Hotline is committed to investigate and resolve all employee concerns or
complaints and must report the outcome to Magna's Global Human Resources
Department.
Employee Relations Advisory Board
The Employee Relations Advisory Board is a group of people who have proven
recognition and credibility relating to humanitarian and social issues. This
Board will monitor, advise and ensure that Tesma operates within the spirit of
this Employee's Charter and the principles of Tesma's Corporate Constitution.
Corporate Governance
Tesma believes that effective corporate governance structures and practices help
to protect the well-being of the Corporation as a whole and its stakeholders.
Accordingly, Tesma has adopted a number of structures and procedures to assist
in the implementation of effective corporate governance practices and permit the
Board of Directors to functions independently of management. These include:
Ί
Ί Tesma's Corporate Constitution, which attempts to strike a balance
among Tesma's stakeholders - its employees, managers and
investors - by specifically defining their respective rights to
participate in the Corporation's profits, while at the same time
imposing certain responsibilities and disciplines on management;
Ί
Ί Tesma's Board Charter, which requires that a majority of the Board of
Directors be comprised of independent directors, formalizes the
Board's overall responsibility for the stewardship of Tesma and
assists in defining the limits of management's responsibility;
Ί
Ί Tesma's Audit Committee Charter, which formalizes the Audit
Committee's responsibility for ensuring the integrity of Tesma's
financial statements and the financial reporting process;
Ί
Ί Tesma's Corporate Governance and Compensation Committee Charter, which
invests this Committee with broad authority for the development of
Tesma's system of, and overall approach to, corporate governance
generally; and
Ί
Ί Tesma's Code of Conduct, applicable equally to our directors, officers
and employees, which defines the types of conduct which Tesma
encourages and those which it prohibits, and establishes a system of
enforcement to ensure effective implementation of the Code.
Each of the above, together with the other elements of Tesma's corporate
governance structures and practices, are available for review on Tesma's website
(www.tesma.com) under the heading Corporate.
TESMA 23
Review
[PHOTO]
25 Management's Discussion and Analysis
44 Financial Results
44 Management's Responsibility for Financial Reporting
44 Auditors' Report
45 Consolidated Financial Statements
52 Notes to Consolidated Financial Statements
80 Quarterly Results of Operations
81 Historical Financial Summary
82 Shareholder Information
84 Board of Directors
85 Officers
86 Corporate Information
24 TESMA
Management's Discussion and Analysis of Results of Operations and Financial
Position
For the year ended December 31, 2003
Tesma International Inc. (Tesma or the Company) designs, engineers,
tests and manufactures technologically-advanced powertrain (engine, transmission
and fuel) components, modules and systems for the global automotive industry.
Subsequent to our acquisition of Davis Industries, Inc. (Davis), we employ
approximately 5,500 skilled and motivated people in 28 manufacturing facilities
in North and South America, Europe and Asia, and five focused tooling, design
and research and development (R&D) centres supporting our three principal
product technology groups: Tesma Engine Technologies, Tesma Transmission
Technologies and Tesma Fuel Technologies.
Effective December 31, 2002, we changed our fiscal year end from July to
December. This change was made, in part, to enable our financial performance to
be compared more readily to that of our peer group in the automotive industry.
The statements of income and cash flows presented for the immediately preceding
period for comparative purposes in our consolidated financial statements are for
the five-month period ended December 31, 2002. However, to provide for more
informative and appropriate discussion and analysis, the following management's
discussion and analysis of our results of operations and financial position
(MD&A) will focus on the audited results for the year ended December 31, 2003
compared to results for the unaudited year ended December 31, 2002 (as presented
on page 28 of this annual report). This MD&A should be read in conjunction with
the accompanying audited consolidated financial statements and notes for the
year ended December 31, 2003 found on pages 44 through 79 of this annual report.
All amounts reported in this MD&A are in millions of U.S. dollars unless
otherwise noted.
OVERVIEW
Our strategic objective is to be the world's leading Tier 1 supplier of
advanced powertrain modules and systems. Our ability to develop and manufacture
individual components and to assemble them as highly-engineered modules and
systems places us at the forefront of industry trends towards modularization and
outsourcing. Our reputation for product quality and reliability, our strong
customer relationships and our world-class development, manufacturing and
testing capabilities help position us to achieve this objective.
We posted strong 2003 results, despite continued vehicle production
declines and decreasing market share at our traditional North American
customers. Our content per vehicle for the year increased in both of our major
markets, reflecting the launch of more complex and value-added modules and
systems over the latter part of the year. These launches included our first
fully-integrated engine front cover module for General Motors' (GM) High Feature
V6 engine, the fuel filler pipe assembly for Ford's high-volume C170 Focus
program in Europe and initial ramp-up volumes of several new production programs
launched in South Korea.
We completed the acquisition of Davis in early January 2004. This
acquisition increases our presence in the United States, including the south,
providing us with a closer presence to some of our non-traditional customers. It
also improves the balance of our North American operations between Canada and
the United States which, given the recent strength of the Canadian dollar,
improves our overall competitiveness. The majority of Davis' current product
base complements our existing transmission product offerings and other stamped
components. Given Davis' existing strong relationships with Ford, Honda and
Nissan, we see the opportunity to expand and strengthen our relationships with
these customers and offer our broader and more technologically-advanced
transmission and engine modules and systems to them.
We also made additional strategic investments in foreign markets during
2003. First, we completed a transaction to acquire a 55% interest in an Italian
company which will produce pulleys and other engine components for European
customers. We intend to capitalize on this additional presence in Europe with
the launch of new production business in the near term (including water pump
assemblies) and, over the longer term, as we pursue our objective of increasing
the penetration of our more complex modules and systems across the European
market. Additionally, we have entered the Chinese market with a moderate
investment in a new plant to establish limited production capability. We view
China as a market with strong growth potential; however, our initial focus will
be to support the operations of some of our current customers that have set up
production facilities in China. Through this initial step, we intend to gain
valuable insight and experience in operating in China and ultimately reduce risk
as we plan for additional investments in this developing automotive market. Our
newly established presence will put us in a better position to capitalize on
future opportunities that are likely to evolve.
Our content per vehicle increased in both of our major markets as we launched
more complex, value-added modules and systems.
We made strategic investments beyond our domestic market through acquisitions
and plant start-ups in the United States, Italy and China.
TESMA 25
As previously reported, our future business growth looks strong with the
awards of new business during the latter part of the year from some of our
traditional customers (new assemblies for DaimlerChrysler and for GM, in
particular the engine front cover module, water pump and oil pan for GM's new
3.9L engine used in their higher volume midsize car platforms) and
non-traditional customers (including water pumps and oil pumps for the PSA
Group, other assemblies for Land Rover, as well as the selection of our South
Korean facility by Hyundai Motor Company to supply front cover modules for a new
V6 engine program to be produced in both Korea and North America). Our future
growth was further solidified by some recent awards of significant business
including cam covers for GM's Line 4, 5 and 6 engine programs (which are
installed in their mid-size SUV and pick-up truck platforms) and takeover
volumes to supply several die-cast and machined components and assemblies that
are currently installed into GM's 4T65E, 4T80E and 4L80 transmissions (which are
assembled into certain of their mid-size vehicles, full-size Cadillac models and
heavier duty full-size pick-up trucks, respectively). This organic growth,
combined with the acquired Davis business, provides a solid base for us to
continue our track record of growth.
Although we funded a significant portion of the Davis acquisition from
our existing cash balances, our financial position continues to be very strong.
Our considerable cash reserves that remain will enable us to capitalize on new
business opportunities and we continue to look for other potential acquisition
targets that, like Davis, will add both growth and profitability, at a
reasonable price, and will ultimately increase shareholder value.
As previously communicated, we undertook an evaluation of the viability
of our German die-casting operations (Eralmetall) and potential initiatives that
could help improve its operating performance. This evaluation was completed
during the fourth quarter of 2003. Over the past eighteen months, Eralmetall's
new management team has worked hard to improve production and eliminate waste,
our employees have agreed to assist in achieving targeted savings and our
customers have expressed a willingness to discuss alternatives to support this
operation. Although still not meeting our financial expectations, the decision
was made to continue operating Eralmetall as a going concern in support of our
customers, as doing so is not expected to significantly affect our overall
results. We will continue to closely monitor the results of this operation and
evaluate its future prospects should results deteriorate.
ACQUISITION OF DAVIS INDUSTRIES, INC.
Subsequent to our year-end, on January 2, 2004, we completed the
acquisition of Davis. Through this acquisition, we added over 700 employees and
3 manufacturing facilities located in Indiana (2 facilities) and Tennessee to
our North American manufacturing operations. Davis' main product focus is
stamped powertrain components and assemblies, including driveplate assemblies,
transmission shells and oil pan assemblies and engine valve covers, but also
includes some body and chassis stampings and fuel filler door assemblies. For
their most recently completed fiscal year ended September 30, 2003, Davis
reported sales of approximately $129 million.
The total consideration for the acquisition of all the outstanding
shares of Davis amounted to approximately $75.0 million, consisting of
$45.1 million paid in cash (including transaction costs), the assumption of
$22.0 million of long-term debt, $4.5 million of other long-term obligations and
the issuance of a $3.4 million five-year note payable bearing interest at the
rate of prime plus 1% per annum (see Note 24(a) of the accompanying audited
consolidated financial statements and notes thereto).
OTHER ACQUISITION
In October 2003, we completed the acquisition of a 55% interest in Agla
Benevento S.r.l. of Benevento, Italy (subsequently renamed Tesma-Agla S.r.l.
(Tesma-Agla)), for cash consideration, including transaction costs, of
$1.2 million (net of cash acquired of $0.2 million). The transaction was
accounted for under the purchase method of accounting and the initial impact on
our consolidated balance sheet was an increase in non-cash working capital of
$0.4 million, property, plant, equipment and other long-lived assets of
$2.6 million, assumed debt of $2.0 million and net future tax assets of
$0.2 million.
Our future growth will be driven by new business awards and acquisitions.
26 TESMA
Pursuant to agreements executed upon the closing of the transaction, the
approval of certain strategic, operating and financing decisions of this company
are subject to a majority vote by Tesma-Agla's Board of Directors. The Board of
Directors consists of four members, of which we are entitled to appoint two
(including the Chairman of the Board). We account for our interest in this
jointly-controlled entity using the proportionate consolidation method.
Tesma-Agla had no operating activities prior to October 2003, but was preparing
for the launch of pulleys and other engine components for the European market.
ACCOUNTING CHANGES
Reporting Currency
Effective January 1, 2003, we implemented the previously announced
change in our financial reporting currency from the Canadian dollar to the
United States dollar (U.S. dollar). This change enables our financial
performance to be compared more readily to that of our peer group in the global
automotive industry. We implemented this change in accordance with Canadian
generally accepted accounting principles (CDN GAAP) and consistent with the
requirements under accounting principles generally accepted in the United States
(U.S. GAAP). In accordance with these rules, comparative amounts have been
restated in U.S. dollars using the current rate method, whereby all revenues,
expenses and cash flows are translated at the average exchange rates that were
in effect during these periods and all assets and liabilities are translated at
the closing rate in effect at the end of these periods. Utilizing this method,
the comparative unaudited consolidated statements of income and cash flows for
the year ended December 31, 2002, as presented and discussed in this MD&A, were
translated into U.S. dollars using an average rate for the year of U.S. $0.6372
per CDN $1.00. The comparative consolidated balance sheet at December 31, 2002
was translated into U.S. dollars using the prevailing rate at December 31, 2002
of U.S. $0.6376 per CDN $1.00.
Stock-Based Compensation
In September 2003, the Canadian Institute of Chartered Accountants
(CICA) issued amendments to Handbook Section 3870, "Stock-Based Compensation and
other Stock-Based Payments" (CICA 3870) which are effective for fiscal years
beginning on or after January 1, 2004. The amended standard now requires
recognition of all stock-based compensation transactions at fair value and
eliminates the alternative of using the intrinsic value method of accounting
with fair value disclosures provided on a pro forma basis. We have elected to
adopt these amendments early and to apply them on a retroactive basis to
stock-based awards granted on or after August 1, 2002, the date we were
initially required to adopt CICA 3870. Upon application of the new rules, we
recorded compensation expense totaling $0.5 million and $0.1 million in the
years ended December 31, 2003 and 2002, respectively. Diluted earnings per share
for these same periods decreased by $0.01 and $nil, respectively, as a result of
the adoption of these rules.
Compensation expense to be recognized is determined by first calculating
the total estimated fair value of each tranche of stock options as at the date
of grant and then recording compensation expense, on an amortized basis, over
the applicable vesting periods of the underlying stock options. As such, at each
reporting date, cumulative compensation expense will be recognized for each
tranche of stock options to the extent that they are vested as at that date.
Compensation expense recognized is recorded as part of selling, general and
administrative expense, with a corresponding increase to contributed surplus. As
the underlying stock options issued on or after August 1, 2002 are exercised, a
portion of the accumulated balance in contributed surplus is transferred
systematically to the Class A Subordinate Voting Shares issued and reflected as
additional proceeds received on these exercises.
REPORTING CURRENCY
The currency in which a company discloses its financial information including
its financial statements. Tesma's reporting currency is the U.S. dollar. All of
Tesma's divisions with functional currencies other than the U.S. dollar have
their financial results converted to U.S. dollars for reporting purposes.
TESMA 27
RESULTS OF OPERATIONS
The Company's comparative consolidated operating results for the years
ended December 31, 2003 and 2002 are as follows:
2003 2002
(U.S. dollars in thousands, except per share and share
figures) (audited) (unaudited)
Sales $ 1,098,591 $ 925,921
Cost of goods sold 855,503 718,136
Selling, general and administrative 69,204 59,833
Depreciation and amortization 51,609 40,536
Affiliation and social fees 12,449 10,404
Interest (income) expense, net (204 ) 1,987
Impairment loss at German die-casting subsidiary - 12,088
Income before income taxes 110,030 82,937
Income taxes 35,918 26,978
Net income attributable to Class A Subordinate Voting Shares
and Class B Shares $ 74,112 $ 55,959
Earnings per Class A Subordinate Voting Share or Class B
Share
Basic $ 2.29 $ 1.82
Diluted $ 2.28 $ 1.80
Average number of Class A Subordinate Voting Shares and
Class B Shares
outstanding (in thousands)
Basic 32,344 30,725
Diluted 32,531 31,057
Impairment Loss at German Die-Casting Subsidiary
Our comparative results for the year ended December 31, 2002 were
significantly affected by an impairment loss booked in 2002 at Eralmetall, our
German die-casting subsidiary. Initially prompted by a history of operating
losses and projected future losses following the launch of new business at
Eralmetall, we initiated and completed a review for impairment on $20.6 million
of machinery, equipment, land, buildings and other long-lived assets at this
subsidiary. As a result of this review, an impairment loss of $12.1 million
($8.5 million after applicable taxes) was recorded as an operating expense in
the year ended December 31, 2002. The impact of this loss on diluted earnings
per share for the year ended December 31, 2002 was $0.27.
Foreign Currency Exchange Rates
As substantially all of our operations have functional currencies other
than the U.S. dollar, our reported results in U.S. dollars can be affected by
movements in the exchange rates of the Canadian dollar, euro, Swiss franc and
Korean won, all relative to the U.S. dollar. The magnitude of the impact of
foreign exchange on our results in periods presented will primarily depend on,
and vary directly with, the size of fluctuations, relative to the U.S. dollar,
of the underlying functional currencies in our Canadian, European and South
Korean-based operations.
The average exchange rates for our most significant functional
currencies relative to the U.S. dollar during the years ended December 31 were
as follows:
2003 2002 %
Canadian dollar 0.7159 0.6372 +12%
Euro 1.1320 0.9456 +20%
Korean won 0.000840 0.000804 +4%
The impact of the strengthening of foreign currencies relative to the
U.S. dollar, in particular strong gains by the Canadian dollar and euro,
increased sales by approximately $125 million or 72% of our overall growth in
2003. Similarly, the strengthening of these functional currencies significantly
affected all other line items on our income statement, the extent of which will
be specifically addressed in each of the respective discussions that follow.
FUNCTIONAL CURRENCY
The currency in which each entity transacts its business. For example, a
subsidiary located in Germany uses the euro as its functional currency, and pays
its employees and purchases the majority of its materials in its functional
currency.
FOREIGN CURRENCY TRANSLATION
When divisional functional currency results are converted to Tesma's reporting
currency (U.S. dollars), the results are converted at the average foreign
exchange rate for the period.
28 TESMA
The exchange rates in effect as at the end of the years ended
December 31 were as follows:
2003 2002 %
Canadian dollar 0.7752 0.6376 +22%
Euro 1.2591 1.0411 +21%
Korean won 0.000836 0.000835 unch.
Vehicle Production Volumes
Change
2003 2002 Units %
(in millions of units)
North America 15.9 16.3 (0.4 ) -3%
Europe 16.4 16.3 0.1 +1%
North American vehicle production volumes, as historically reported by
us, included medium and heavy trucks. To conform our reporting with most of our
industry peers, effective January 1, 2003, we changed our reporting basis to
include light vehicles only. All comparative North American vehicle production
and content per vehicle amounts have been restated to conform with this new
presentation. On this basis, North American vehicle production volumes for the
year were 15.9 million units, a 3% decrease from the 16.3 million units produced
in the prior year. In 2003, North America's "Big Three" (General Motors, Ford
and DaimlerChrysler) Original Equipment Manufacturers (OEMs) continued to offer
record levels of attractive financing rates and other consumer incentive
campaigns to spur demand and maintain market share. However, the use of these
incentive campaigns was unsuccessful in the aggregate as the "Big Three"
experienced production declines ranging from 3% to 9% in 2003. As a result,
their production share declined largely to the benefit of the New Domestic
OEMs (mainly Toyota, Honda and Nissan) which experienced production volume
increases ranging from 8% to 11% during the year.
In Europe, vehicle production volumes were 16.4 million, up 1% from last
year. However, some of our larger customers, namely DaimlerChrysler and Fiat,
experienced production declines of 3% and 16%, respectively, during the year.
Average Content per Vehicle
Average content per vehicle is a measure commonly used in the automotive
supply industry to measure a company's growth, penetration and success,
excluding the impact of fluctuations in vehicle production levels. Continued
growth in content per vehicle indicates success in introducing products onto new
programs (primarily engine and transmission) or vehicle platforms, and/or
expanded sales on existing programs (i.e. if more vehicle platforms are added to
a particular engine program, or if strong demand for certain vehicle platforms,
such as SUVs, is driving increased engine production on which we have
significant content). Industry analysts use content per vehicle to assess our
performance and growth in our two major markets, North America and Europe. This
measure is calculated by dividing our production sales to North American and
European customers, respectively, by the industry's North American and European
total light vehicle production volumes, respectively. Although this measure does
indicate growth, management does not place significant emphasis on this measure
to assess performance as it has certain shortcomings. The majority of our
products are shipped to OEM engine and transmission facilities, not vehicle
assembly plants. Many engine and transmission programs are produced in a single
facility, and then shipped to many global assembly facilities. As a result, the
number of engine and transmissions produced in each major region in which we
operate can differ materially from the number of vehicles assembled.
Unfortunately, the availability of accurate data for engine and transmission
production in each of our three key markets does not currently exist on a timely
basis. Therefore, we cannot use an alternative measure to present content
information on a timely basis.
Our average content per vehicle for the years ended December 31 was as
follows:
2003 2002 %
North America $43.95 $36.87 +19%
Europe 16.28 14.90 +9%
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TESMA 29
Sales
2003 2002 Change
(in millions)
North America $ 856.0 $ 725.5 +18%
Europe 235.6 180.6 +30%
Other Automotive 28.8 33.8 -15%
Intersegment (21.8 ) (14.0 )
Total external sales $ 1,098.6 $ 925.9 +19%
Consolidated sales in 2003 increased 19% from 2002 to $1.1 billion.
North American sales rose 18%, while sales increased 30% in our European
operations. Our strong growth in North America occurred despite the 3% decrease
in North American vehicle production volumes and even larger declines
experienced by our largest customers. In Europe, our growth was fueled by the
launch of new business, as vehicle production levels increased only slightly
over the prior year.
North American Operations
During 2003, our North American operations consisted of 15 manufacturing
facilities (13 in Canada and 2 in the United States) employing 3,600 employees.
These operations reported sales of $856.0 million for the year, up 18% from
$725.5 million in the prior year. The stronger Canadian dollar accounted for
approximately $85 million or 65% of this growth. The remaining increase of
approximately $45 million represents true native currency growth of 6%, and, as
discussed above, was realized despite the 3% to 9% production declines at our
largest customers. Our growth was fueled by increases in our average content per
vehicle, which grew 19% to $43.95 for the year from $36.87 for 2002. The true
native currency growth in 2003 reflects new program launches and higher volumes
on production ramp-ups of other recently launched programs.
The new launches include a complex integrated front cover module for the
GM High Feature V6 engine, balance shaft assemblies for GM's Line 4 and Line 5
engine programs, water pumps, camshaft phasers and housings for GM's Premium V8
engine, and fuel filler pipe assemblies for DaimlerChrysler's JR car and HB
truck programs. We were not able to realize the full benefit of these launches,
however, as many of them occurred in the second half of the year at lower than
expected levels.
Significant programs on which we achieved higher volumes included the
following:
Ί
Ί the complex oil pump assembly and other components supplied for Ford's
5R110 transmission used in the diesel engine application of Ford's
heavier duty F-Series trucks;
Ί
Ί front covers with an integrated oil pump, oil pan, thermostat housing
and crossover tube and other components for GM's L850 4-cylinder
engine program used in some of GM's high volume vehicle platforms
(including the Chevrolet Cavalier and Malibu, Pontiac Sunfire and
Grand Am and Saturn Ion and VUE models);
Ί
Ί continued strength in demand for GM's GEN III/IV engine installed in
light trucks, including full-size pickups (including the Chevrolet
Silverado and Avalanche models) and SUVs (including the Chevrolet
Tahoe and Suburban and GMC Yukon);
Ί
Ί the water pump assembly for the Honda Accord; and
Ί
Ί certain tensioner and alternator decoupler programs for Ford, GM,
Honda and VW.
The above increases in our North American content were partially offset
by the continuing pressure for price givebacks. North American sales represented
76% of our consolidated sales for the year compared to 77% last year.
European Operations
Our six European manufacturing facilities located in Germany, Austria
and Italy employed 1,100 employees during 2003. These operations experienced a
$55.0 million or 30% sales increase in 2003, despite an increase in vehicle
production volumes of less than 1%. This growth was fueled by the strengthening
of the euro relative to the U.S. dollar, which accounted for approximately
$38 million (over two-thirds) of this increase. The remaining $17 million
increase in sales for the year resulted from the growth in our European content
per vehicle (presented in euros to exclude the impact of foreign exchange
fluctuations) of 9% to 16.28 from 14.90 last year.
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Sales grew 19% to $1.1 billion despite declining vehicle production in North
America and a marginal increase in Europe.
30 TESMA
The growth in content per vehicle primarily reflects:
Ί
Ί the initial launch and ramp-up in volumes of the fuel filler pipe
assembly for Ford's high-volume C1 (Focus) platform launched in the
summer of 2003;
Ί
Ί increased shipments of drive belt tensioners and other components
launched for the Volkswagen Group (VW), GM and DaimlerChrysler;
Ί
Ί the continued ramp-up in volumes for a stainless steel fuel tank
assembly for the portion of VW's PQ34 program volumes assembled in
Mexico and sold in California;
Ί
Ί volume increases on the steel fuel tank assembly programs for Volvo
and Audi initially launched during the third quarter of 2002;
Ί
Ί higher sales of the rear-axle crossover component and other parts
supplied to DaimlerChrysler; and,
Ί
Ί an increased supply of service parts.
European sales represented 21% of our total consolidated sales in 2003
compared to 19% in the prior year.
Other Automotive
During 2003, our Other Automotive segment consisted of 2 manufacturing
facilities in South Korea, one facility in China and a small assembly facility
in Brazil, employing approximately 300 people in aggregate. Sales for the year
were 15% lower at $28.8 million versus $33.8 million a year earlier and
represented approximately 3% of our consolidated sales, compared to
approximately 4% last year. The decrease in sales for the year occurred
primarily in our South Korean facilities and resulted from lower shipments of
the oil pump for the Ford FN transmission, declining volumes on Ford's 1.9L
engine oil and water pumps, (which are expected to balance out soon) and lower
exports to Japan (as certain older programs produced for Mazda balance out). In
addition, a significant amount of tooling sales associated with the 2003
launches at our South Korean facilities were booked in 2002. Many of these new
program launches involve long "lead-time" requirements for customers in the
United States and Europe, so although initial volumes have been produced and
shipped for some of these programs, the sales (and related contribution margin)
are deferred until customer receipt and in some instances, acceptance, in
accordance with the specific terms of each customer contract. The new launches
that occurred in the latter part of the year include the DaimlerChrysler 5.7L
engine water pump, an adaptor assembly for the GM line 4 engine program, a front
cover and water pump for Renault-Nissan-Samsung's new SM3 engine program, and a
front cover and water pump exported to GM North America for their Premium V8
engine used in certain Cadillac models.
Tooling and Other
For 2003, tooling and other sales were constant at $55.3 million.
However, translation increases of approximately $6 million resulting from the
strengthening of our functional currencies relative to the U.S. dollar were
offset by the absence of large tooling sales for the fuel tank assembly programs
in Austria which occurred in 2002. For the year, our North American operations
recorded 70% of consolidated tooling sales, while Europe and Other Automotive
reported 27% and 3%, respectively, compared to 55%, 38%, and 7%, respectively,
for the same operations a year ago.
Sales by Geographic Region and by Customer
Sales to our North American customers increased 15% to $728.7 million in
2003 compared to $631.6 million last year, and represented 66% of our
consolidated sales in 2003 (68% in 2002). As a result, our North American
content per vehicle increased due to the specific programs discussed above.
Sales to our European-based customers grew 26% to $326.0 million compared to
$258.1 million a year ago, and represented 30% of our consolidated sales in 2003
(28% in 2002). European content per vehicle increased by approximately 9% over a
year ago reflecting new fuel system programs launched for our European
customers. Sales to Australasian customers increased by 31% to $30.1 million in
2003 compared to $23.0 million last year, and represented approximately 3% of
our consolidated sales. Our sales to South American customers increased slightly
by 4% to $13.8 million and continue to account for approximately 1% of our
consolidated sales.
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TOOLING
Tooling consists of custom-built moulds, dies or other tools that are designed
for the production of unique parts to be supplied to a specific customer.
AUSTRALASIAN CUSTOMERS
Our customers with manufacturing facilities located in Korea, Australia, Japan,
China, Thailand, Taiwan, Singapore and other Asian countries.
TESMA 31
Sales to GM, Ford, DaimlerChrysler and the VW Group, our four largest
customers, were 76% of total sales in the current and prior year. GM represented
approximately 43% of our consolidated sales, similar to 2002. While no single
product accounted for more than 10% of our consolidated sales in the years ended
December 31, 2003 and 2002, respectively, approximately 20% of consolidated
sales were generated from a number of components, modules and assemblies
produced for GM's GEN III/IV and L850 engine programs, compared to 18% of sales
from these programs in the prior year.
Sales by Product Line
On a product line basis, sales of Tesma Engine Technologies products
increased to $745 million compared to $639 million a year ago and accounted for
68% of consolidated sales compared to 69% a year ago. The growth was the result
of increased sales of tensioners and decouplers, volume increases in the water
pump and die-casting businesses in North America, increased volumes for plastic
water management products, an increase in service and aftermarket sales in
Europe and translation increases on stronger Canadian dollar and euro currencies
relative to the U.S. dollar.
Sales of Tesma Transmission Technologies products rose 15% to
$250 million from $218 million a year ago and represented 23% of total sales in
2003, compared to 24% in 2002. The increase is primarily due to the volume
increases for the oil pump and other components supplied for the Ford 5R110
transmission and currency translation, primarily due to a stronger Canadian
dollar relative to the U.S. dollar.
Sales of Tesma Fuel Technologies products increased 51% to $104 million
from $69 million in 2002, driven in part by a strengthening euro relative to the
Canadian dollar, as a significant portion of Fuel Technologies products are
produced in Europe. Also contributing to the increase was the launch of the
high-volume fuel filler pipe for Ford's C1 Focus platform and volume increases
on stainless steel fuel tank assemblies for VW, Volvo and Audi. Sales of Tesma
Fuel Technologies products represented 9% of consolidated sales in 2003 up from
7% in 2002.
Gross Margin
2003 2002 Change
(in millions)
Sales $ 1,098.6 $ 925.9 +19%
Cost of goods sold 855.5 718.1 +19%
Gross margin $ 243.1 $ 207.8 +17%
Gross margin percentage 22.1 % 22.4 % -1%
Gross margin as a percentage of sales decreased by 1% in 2003 to 22.1%
compared to 22.4% in 2002.
The decline in our gross margin percentage for the year reflected:
Ί
Ί a continued shift in mix (as we execute our strategy) to much higher
material content modules and systems (including integrated engine
front covers, camshaft phasers, filler pipe assemblies, balance shaft
assemblies, combined with volume increases on the Ford 5R110
transmission oil pump and various stainless steel fuel tank programs);
Ί
Ί the negative impact of the 3% decline in North American production
volumes (with higher declines experienced at our key customers);
Ί
Ί the continued launch and operating support costs at certain facilities
in North America and South Korea, in the midst of, or in preparation
for, program launches, (some of which have been delayed);
Ί
Ί higher facility rental costs (with a corresponding but lesser
reduction of depreciation) for certain manufacturing facilities sold
to MI Developments Inc. (MID) in January 2003 and now leased back (see
"Other Matters" below); and
Ί
Ί continued pricing concessions demanded by our customers.
[[Image Removed: BAR CHART]]
Our four largest customers - GM, Ford, DaimlerChrysler and the VW
Group - accounted for 76% of total sales in 2003.
32 TESMA
Partially offsetting these negative factors were positive items that
included:
Ί
Ί a lower realized exchange rate on U.S. dollar-denominated material
purchases by certain of our Canadian operations;
Ί
Ί recognized R&D tax credits relating to prior fiscal years that were
claimed under new rules and interpretations governing claimable
expenditures;
Ί
Ί improvements in operating results at our Eralmetall die-casting
operation (including employee benefit savings); and
Ί
Ί labour efficiencies on highly-automated programs, improvements in
capacity utilization and other production efficiencies achieved at
certain of our facilities.
Gross R&D expenditures in 2003 were $18.0 million, $0.5 million higher
than the prior year. Customer and government funding and tax credits reduced net
R&D expenses by approximately $8 million in 2003 compared to $6 million in 2002.
Gross spending on R&D was 16% of income before income taxes in 2003 exceeding
our Corporate Constitution requirement of investing no less than 7% of profit
before income taxes in R&D.
Income Before Income Taxes
2003 2002 Change
(in millions)
Gross margin $ 243.1 $ 207.8 +17%
Less:
Selling, general and administrative 69.3 59.8 +16%
Depreciation and amortization 51.6 40.6 +27%
Affiliation and social fees 12.4 10.4 +19%
Interest (income) expense, net (0.2 ) 2.0 -110%
Impairment loss at German die-casting subsidiary - 12.1 -100%
Income before income taxes $ 110.0 $ 82.9 +33%
Income before income taxes increased by 33% to $110.0 million in 2003
compared to $82.9 million in 2002. The increased gross margin on higher sales
and interest income (versus interest expense in 2002) was partially offset by
higher selling, general and administrative (SG&A) costs, increased depreciation
charges, and higher affiliation and social fees paid to Magna International Inc.
(Magna).
Fueled by higher content per vehicle levels and the translation impact
of a stronger Canadian dollar relative to the U.S. dollar during the year,
income before income taxes at our North American operations increased 11% to
$97.5 million or 89% of consolidated income before income taxes, compared to
$87.6 million in 2002. Our European operations contributed $18.3 million or 17%
of consolidated income before income taxes this year compared to a loss of
$6.1 million a year ago, largely attributable to the impairment loss recorded at
Eralmetall in 2002 totaling $12.1 million. Excluding this impairment loss, our
European operations still showed improvement reflecting better capacity
utilization on increased sales at our Austrian subsidiary, the positive impact
of the employee benefit savings and reduced depreciation charges at Eralmetall,
and translation increases due to a strengthening euro. Our Other Automotive
operations (which include local sales and engineering offices in Asia and South
America) reported a loss before income taxes of $5.8 million in 2003 compared to
$1.5 million of income last year. The decline in the results for this segment
reflects the balancing out of older programs at our South Korean facilities
combined with higher engineering, design and other upfront product development
and support costs for current and future program launches. In addition, we also
incurred costs associated with the initial start-up of operations in China.
Selling, General and Administrative Expenses
SG&A expenses increased to $69.3 million in 2003 compared to
$59.8 million in 2002, or approximately 6.3% and 6.5% respectively of our
consolidated sales in these periods. The $9.5 million increase in SG&A costs
resulted primarily from foreign exchange translation, which contributed
approximately $8 million of additional translated expenses. In addition, other
increases during the year included costs incurred for potential acquisitions
that did not materialize, $0.5 million of stock compensation expenses booked
upon the adoption of new accounting rules, a provision for cost overruns on
capital equipment charged by a related party (as described in more detail in
Note 20(b)(ii) of the accompanying consolidated financial statements and notes
thereto) and increased incentive-based compensation based on significantly
higher profitability levels this year (largely due to the negative impact of the
impairment loss booked in the prior year). These increases were partially offset
by foreign exchange gains (including recognized currency translation gains) in
the current year compared to losses recorded in the same period a year ago.
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Our Corporate Constitution requires we invest 7% of profit before income taxes
on R&D - in 2003 we invested 16%.
TESMA 33
Commencing January 1, 2003, specific charges paid to Magna Services Inc.
(ServiceCo), a wholly-owned subsidiary of Magna, were reclassified and recorded
primarily as part of SG&A costs (with prior year's comparative amounts restated
on the same basis). These specific charges are negotiated annually and are based
on the level of benefits or services provided to us by ServiceCo and include,
but are not limited to: information technology (WAN infrastructure and support
services), human resource and employee relations services (including
administration of the Employee Equity Participation and Profit Sharing Program),
specialized legal, environmental, finance and treasury support, management and
technology training, and an allocated share of the facility and overhead costs
dedicated to providing these services. For the year, we paid $1.7 million for
specific charges compared to $1.9 million a year ago. The amount paid in 2002
includes approximately $0.4 million of costs billed by ServiceCo for services
provided in 2001.
Depreciation and Amortization
Depreciation and amortization expense increased by 27% to $51.6 million
in 2003 from $40.6 million in 2002. The increase resulted from our continuing
investment in capital assets (over $61 million over the past twelve months)
primarily for facility upgrades and equipment for new programs, many of which
were put into service for launches during 2003. Further increasing depreciation
and amortization for the year was $1.4 million of non-cash provisions recorded
in relation to specific assets for which changes in the respective circumstances
surrounding their utilization indicated impairments.
Affiliation and Social Fees
Affiliation and social fees paid to Magna increased by 19% to
$12.4 million in 2003 compared to $10.4 million in 2002 and include the
following:
Ί
Ί Under our amended and restated affiliation agreement with Magna in
effect until December 31, 2009 (subject to annual renewals
thereafter), we pay an affiliation fee calculated as 1% of our
consolidated net sales, subject to certain exceptions for sales from
acquired businesses (which are exempt from the calculation of the
affiliation fee in the year of acquisition, with 50% inclusion in the
year after acquisition and full inclusion in all subsequent years).
The affiliation fee is paid to Magna in exchange for, among other
things, a non-exclusive worldwide license to use certain Magna
trademarks, access to Magna management resources, and the
collaboration and sharing of best practices in areas such as new
management techniques, employee benefits and programs, marketing and
technological initiatives. For the year, we paid $10.8 million under
the affiliation agreement, compared to $9.2 million a year ago,
entirely a result of our increased sales levels.
Ί
Ί Under our social fee agreement with Magna in effect until December 31,
2009 (subject to annual renewals thereafter), we pay Magna a social
fee of 1.5% of profits before income taxes as a contribution towards
social and charitable programs coordinated by Magna on behalf of Magna
and its affiliated companies. We paid $1.6 million of social fees to
Magna in 2003 compared to $1.2 million last year.
Net Interest (Income) Expense, net
Net interest income amounted to $0.2 million in 2003 compared to
$2.0 million of interest expense in 2002, due primarily to higher levels of cash
and cash equivalents for the majority of 2003 which were available for
investment in short-term interest bearing investments.
Impairment Loss at German Die-Casting Subsidiary
As discussed in the Overview section of this MD&A, in the year ended
December 31, 2002, we recorded an impairment loss of $12.1 million ($8.5 million
after applicable taxes) on capital and other long-lived assets at our German
die-casting subsidiary. The impact of this loss on diluted earnings for the year
ended December 31, 2002 was $0.27.
34 TESMA
Net Income and Earnings per Share
2003 2002 Change
(in millions)
Income before income taxes $ 110.0 $ 82.9 +33%
Income taxes 35.9 26.9 +33%
Net income attributable to Class A Subordinate Voting Shares and $ 74.1 $ 56.0 +32%
Class B Shares
Earnings per Class A Subordinate Voting Share or Class B Share
Basic $ 2.29 $ 1.82 +26%
Diluted $ 2.28 $ 1.80 +27%
Average number of shares outstanding (in millions)
Basic 32.3 30.7 +5%
Diluted 32.5 31.1 +5%
Effective Income Tax Rates
Our effective income tax rate was 32.6% in 2003 compared to 32.5% last
year. Significantly impacting the rate during the year was the recognition of a
$2.1 million benefit for income tax losses available for carryforward and other
future tax deductible amounts at one of our jointly-controlled entities. The
initial recognition of these amounts became necessary once the entity
established a record of profitability after the launch of its major production
programs, and once its projected future operating results (based on existing
contracts, at existing and future contracted prices and cost structures) are
projected to generate more than sufficient future taxable income to utilize
these future tax deductible amounts. Offsetting this benefit was $1.1 million of
additional future tax expense recorded in relation to the Ontario government's
decision to repeal previously enacted corporate tax rate reductions (thereby
increasing the enacted combined corporate income tax rate from 33.62% to 34.52%)
and losses at certain operations not tax benefited.
In the prior year, a reduction in the effective tax rate due to tax
refunds realized at one of our foreign subsidiaries (as the final stage of prior
year tax planning initiatives) was partially offset by the impact of a lower
overall effective tax rate recorded on the impairment loss at Eralmetall
(reflecting the rates anticipated to be in effect when the amounts would be
deductible for tax purposes).
Net Income
Our net income attributable to Class A Subordinate Voting Shares and
Class B Shares for the year increased by 32% to $74.1 million from $56.0 million
a year ago. Excluding the impact of the impairment charge and foreign currency
translation increases, net income would have been essentially unchanged from a
year ago.
Earnings Per Share
Earnings per Class A Subordinate Voting Share or Class B Share on a
diluted basis increased 27% to $2.28 from $1.80, while basic earnings per
Class A Subordinate Voting Share or Class B Share increased 26% to $2.29 from
$1.82 in 2002. As discussed earlier, the effect of the impairment loss
(excluding its impact on the DPSP and other profit-based fees and compensation)
in the year ended December 31, 2002 was to decrease diluted earnings per Class A
Subordinate Voting Share or Class B Share by $0.27.
These figures reflect 5% increases in the average number of basic and
diluted shares outstanding in the year to 32.3 and 32.5 million, respectively
(from 30.7 and 31.1 million, respectively, last year), due primarily to the
public offering of 2.85 million shares in July 2002.
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TESMA 35
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided from (used for): 2003 2002 Change
(in millions)
Operating activities $ 101.9 $ 107.5 -5%
Investing activities (80.0 ) (69.5 ) +15%
Financing activities (24.5 ) 66.6 -137%
Effect of exchange rate changes on cash and cash 30.8 2.0
equivalents
Net increase in cash and cash equivalents $ 28.2 $ 106.6 -74%
Our cash balances at December 31, 2003, net of bank indebtedness, were
$122.5 million compared to $89.0 million a year earlier. The increase occurred
because cash provided from operations, proceeds from the sale-leaseback
transaction for the Tesma Corporate Campus, the issuance of long-term debt and
proceeds from the exercise of stock options during the year exceeded capital
expenditures, investments in non-cash working capital, the payment of dividends,
debt repayments, reductions in indebtedness levels and funds set aside in escrow
for acquisition related activities.
Operating Activities
2003 2002 Change
(in millions)
Net income $ 74.1 $ 56.0 +32%
Items not involving current cash flows 69.7 56.6 +23%
Cash provided from operations 143.8 112.6 +28%
Net change in non-cash working capital (41.9 ) (5.1 ) +722%
Cash provided from operating activities $ 101.9 $ 107.5 -5%
Cash provided from operations, before the effect of changes in non-cash
working capital, increased 28% to $143.8 million in 2003 compared to
$112.6 million in 2002 due to higher non-cash charges, mainly future tax
provisions (versus net recoveries booked in the prior year) and depreciation.
Investments in non-cash working capital increased $36.8 million due to increased
accounts receivable and inventory levels to support our sales growth, which were
only partially offset by higher levels of accounts payable and accruals. As a
result, cash provided from operating activities decreased 5% to $101.9 million
in 2003 from $107.5 million for the same period last year.
Investing Activities
2003 2002 Change
(in millions)
Capital asset additions $ (61.2 ) $ (68.9 ) -11%
Funds held in escrow (44.6 ) -
Investment in subsidiaries (1.4 ) (1.0 ) +40%
Increase in other assets (0.2 ) (2.0 ) -90%
Proceeds from disposal of capital and other assets 27.2 2.4
Cash and cash equivalents acquired on investment in 0.2 -
subsidiary
Cash used for investing activities $ (80.0 ) $ (69.5 ) +15%
Investment spending in 2003 increased 15% to $80.0 million compared to
$69.5 million in 2002. Cash spent on capital assets decreased 11% to
$61.2 million compared to $68.9 million last year and was spent primarily on
facility upgrades and machinery and equipment purchased to support new
production program launches and increased business.
Capital assets purchased for our North American operations accounted for
62% of the total capital spending in 2003 compared to 72% a year ago. Our
European operations accounted for 21% of our total capital spending in both
years and our Other Automotive operations accounted for 17% compared to 7% a
year ago.
Funds held in escrow consist of $44.6 million of cash deposited into an
escrow account (thus restricting its use) as consideration to be issued upon the
closing of the Davis acquisition.
[[Image Removed: BAR CHART]]
[[Image Removed: BAR CHART]]
36 TESMA
In October 2003, we invested $1.2 million (net of cash acquired) in an
Italian joint venture (see Other Acquisitions discussion). In the prior year, we
made payments totaling $1.0 million under earnout provisions associated with our
acquisition of Triam Automotive Corporation in 1998.
The $27.2 million of cash proceeds from capital asset disposals relates
primarily to the Corporate Campus sale and leaseback transaction completed with
MID in January 2003.
Financing Activities