Magna Announces Fourth Quarter and 2012 Results

AURORA, ON, March 1, 2013 /PRNewswire/ - Magna International Inc. (TSX: MG) (NYSE: MGA) today reported financial results for the fourth quarter and year ended December 31, 2012.

                 
    THREE MONTHS ENDED
DECEMBER 31,
  YEAR ENDED
DECEMBER 31,
    2012   2011   2012   2011
                         
Sales   $ 8,033   $ 7,251   $ 30,837   $ 28,748
                         
Adjusted EBIT(1)   $ 387   $ 321   $ 1,658   $ 1,367
                         
Income from operations before income taxes    $ 341   $ 291   $ 1,750   $ 1,217
                         
Net income attributable to Magna
   International Inc.
  $ 351   $ 312   $ 1,433   $ 1,018
                         
Diluted earnings per share   $ 1.49   $ 1.32   $ 6.09   $ 4.20
                         
All results are reported in millions of U.S. dollars, except per share figures, which are in U.S. dollars.
 
(1)  Adjusted EBIT is the measure of segment profit or loss as reported in the Company's attached unaudited interim consolidated financial statements.
Adjusted EBIT represents income from operations before income taxes; interest expense (income), net; and other expense (income), net

 

THREE MONTHS ENDED DECEMBER 31, 2012

We posted sales of $8.03 billion for the fourth quarter ended December 31, 2012, an increase of 11% over the fourth quarter of 2011. We achieved this sales increase in a period when vehicle production increased 12% in North America and declined 8% in Western Europe, both relative to the fourth quarter of 2011. In the fourth quarter of 2012, our North American, Europe, and Rest of World production sales, as well as tooling, engineering and other sales and complete vehicle assembly sales all increased relative to the comparable quarter in 2011.

Complete vehicle assembly sales increased 12% to $697 million for the fourth quarter of 2012 compared to $625 million for the fourth quarter of 2011, while complete vehicle assembly volumes increased 5% to approximately 31,500 units.

For the fourth quarter of 2012, adjusted EBIT increased 21% to $387 million compared to $321 million for the fourth quarter of 2011.

For the fourth quarter of 2012, income from operations before income taxes was $341 million, net income attributable to Magna International Inc. was $351 million and diluted earnings per share were $1.49, increases of $50 million, $39 million and $0.17, respectively, each compared to the fourth quarter of 2011.

Excluding other expense (income), net, and the income tax valuation allowance releases recorded in the fourth quarters of 2012 and 2011, income from operations before income taxes, net income attributable to Magna International Inc. and diluted earnings per share increased $62 million, $37 million and $0.16, respectively, each compared to the fourth quarter of 2011.

For the fourth quarter ended December 31, 2012, we generated cash from operations of $514 million before changes in non‑cash operating assets and liabilities, and $559 million in non‑cash operating assets and liabilities. Total investment activities for the fourth quarter of 2012 were $949 million, including $478 million in fixed asset additions, $446 million to purchase subsidiaries and $25 million in investments and other assets.

YEAR ENDED DECEMBER 31, 2012

We posted sales of $30.84 billion for the year ended December 31, 2012, an increase of 7% over the year ended December 31, 2011. This higher sales level reflected increases in our North American, European, and Rest of World production sales as well as higher tooling, engineering and other sales, partially offset by lower complete vehicle assembly sales.

For the year ended December 31, 2012, vehicle production increased 18% to 15.5 million units in North America and decreased 7% to 12.7 million units in Western Europe, each compared to 2011.

Complete vehicle assembly sales decreased 5% to $2.56 billion for the year ended December 31, 2012 compared to $2.69 billion for the year ended December 31, 2011, while complete vehicle assembly volumes decreased 5% to approximately 124,000 units.

For the year ended December 31, 2012, adjusted EBIT increased 21% to $1.66 billion compared to $1.37 billion for the year ended December 31, 2011.

For the year ended December 31, 2012, income from operations before income taxes was $1.75 billion, net income attributable to Magna International Inc. was $1.43 billion and diluted earnings per share were $6.09, increases of $533 million, $415 million and $1.89, respectively, each compared to 2011. 

Excluding other expense (income), net, and the income tax valuation allowance releases recorded in 2012 and 2011, income from operations before income taxes, net income attributable to Magna International Inc. and diluted earnings per share increased $269 million, $165 million and $0.83, respectively, each compared to 2011.

For the year ended December 31, 2012, we generated cash from operations before changes in non‑cash operating assets and liabilities of $2.13 billion, and $72 million in non‑cash operating assets and liabilities. Total investment activities for the year of 2012 were $1.92 billion, including $1.27 billion in fixed asset additions, $525 million to purchase subsidiaries and a $122 million increase in investments and other assets.

Don Walker, Magna's Chief Executive Officer commented: "Overall, we are satisfied with our operating results for 2012.  We continued our strong performance in North America.  In Europe, we saw better operating results and a return to profitability.  In the rest of the world, Asia remains profitable, despite the significant new facility activity, and we are taking steps to improve results in South America."

A more detailed discussion of our consolidated financial results for the fourth quarter and year ended December 31, 2012 is contained in the Management's Discussion and Analysis of Results of Operations and Financial Position and the unaudited interim consolidated financial statements and notes thereto, which are attached to this Press Release.

DIVIDENDS

Yesterday, our Board of Directors declared a quarterly dividend of $0.32 with respect to our outstanding Common Shares for the quarter ended December 31, 2012. This dividend is payable on March 27, 2013 to shareholders of record on March 13, 2013.

Vince Galifi, Magna's Chief Financial Officer, stated:  "The 16% increase in our quarterly dividend per share to $0.32, which is a new record for us, reflects our continued strong performance and the confidence our Board has in Magna's future."

UPDATED 2013 OUTLOOK

         
Light Vehicle Production (Units)        
  North America 15.8 million
  Western Europe 11.9 million
         
Production Sales        
  North America $15.4 billion - $15.8 billion
  Europe $9.4 billion - $9.7 billion
  Rest of World $2.2 billion - $2.5 billion
  Total Production Sales   $27.0 billion - $28.0 billion    
         
Complete Vehicle Assembly Sales   $2.6 billion - $2.9 billion    
         
Total Sales   $32.0 billion - $33.4 billion    
         
Operating Margin*┼   Mid 5% range    
         
Tax Rate*   Approximately 24.5%    
         
Capital Spending   Approximately $1.4 billion    
         
* Excluding other expense (income), net
┼ Excluding $158 million amortization of intangibles related to acquisition of E-Car

 

In this 2013 outlook, in addition to 2013 light vehicle production, we have assumed no material acquisitions or divestitures. In addition, we have assumed that foreign exchange rates for the most common currencies in which we conduct business relative to our U.S. dollar reporting currency will approximate current rates.

ABOUT MAGNA

We are a leading global automotive supplier with 313 manufacturing operations and 88 product development, engineering and sales centres in 29 countries. Our 119,000 employees are focused on delivering superior value to our customers through innovative processes and World Class Manufacturing. Our product capabilities include producing body, chassis, interiors, exteriors, seating, powertrain, electronics, mirrors, closures and roof systems and modules, as well as complete vehicle engineering and contract manufacturing. Our common shares trade on the Toronto Stock Exchange (MG) and the New York Stock Exchange (MGA). For further information about Magna, visit our website at www.magna.com.

We will hold a conference call for interested analysts and shareholders to discuss our fourth quarter and year end 2012 results on Friday, March 1, 2013 at 8:00 a.m. EST. The conference call will be chaired by Donald J. Walker, Chief Executive Officer. The number to use for this call is 1-800-699-3428. The number for overseas callers is 1-416-641-6715. Please call in at least 10 minutes prior to the call. We will also webcast the conference call at www.magna.com. The slide presentation accompanying the conference call will be available on our website Friday morning prior to the call. 

FORWARD‑LOOKING STATEMENTS

The previous discussion contains statements that constitute "forward-looking statements" or "forward-looking information" within the meaning of applicable securities legislation, including, but not limited to, statements relating to Magna's expected production sales, based on expected light vehicle production in North America and Western Europe; Magna's expected production sales in the North America, Europe and Rest of World segments; total sales; complete vehicle assembly sales; consolidated operating margin; effective income tax rate; fixed asset expenditures; implementation of improvement plans in our underperforming operations, including South America; and future purchases of our Common Shares under the Normal Course Issuer Bid. The forward-looking information in this document is presented for the purpose of providing information about management's current expectations and plans and such information may not be appropriate for other purposes. Forward-looking statements may include financial and other projections, as well as statements regarding our future plans, objectives or economic performance, or the assumptions underlying any of the foregoing, and other statements that are not recitations of historical fact. We use words such as "may", "would", "could", "should", "will", "likely", "expect", "anticipate", "believe", "intend", "plan", "forecast", "outlook", "project", "estimate" and similar expressions suggesting future outcomes or events to identify forward-looking statements. Any such forward-looking statements are based on information currently available to us, and are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. However, whether actual results and developments will conform with our expectations and predictions is subject to a number of risks, assumptions and uncertainties, many of which are beyond our control, and the effects of which can be difficult to predict, including, without limitation: the potential for a deterioration of economic conditions or an extended period of economic uncertainty; declines in consumer confidence and the impact on production volume levels; risks arising from the recession in Europe, including the potential for a deterioration of sales of our three largest German-based OEM customers; inability to sustain or grow our business with OEMs; restructuring actions by OEMs, including plant closures; restructuring, downsizing and/or other significant non-recurring costs; continued underperformance of one or more of our operating divisions; our ability to successfully launch material new or takeover business; liquidity risks; bankruptcy or insolvency of a major customer or supplier; a prolonged disruption in the supply of components to us from our suppliers; scheduled shutdowns of our customers' production facilities (typically in the third and fourth quarters of each calendar year); shutdown of our or our customers' or sub-suppliers' production facilities due to a labour disruption; our ability to successfully compete with other automotive suppliers; a reduction in outsourcing by our customers or the loss of a material production or assembly program; the termination or non-renewal by our customers of any material production purchase order; a shift away from technologies in which we are investing; risks arising due to the failure of a major financial institution; impairment charges related to goodwill, long-lived assets and deferred tax assets; shifts in market share away from our top customers; shifts in market shares among vehicles or vehicle segments, or shifts away from vehicles on which we have significant content; risks of conducting business in foreign markets, including China, India, South America and other non-traditional markets for us; exposure to, and ability to offset, volatile commodities prices; fluctuations in relative currency values; our ability to successfully identify, complete and integrate acquisitions or achieve anticipated synergies; our ability to conduct appropriate due diligence on acquisition targets; ongoing pricing pressures, including our ability to offset price concessions demanded by our customers; warranty and recall costs; risks related to natural disasters and potential production disruptions; factors that could cause an increase in our pension funding obligations; legal claims and/or regulatory actions against us; our ability to understand and compete successfully in non-automotive businesses in which we pursue opportunities; changes in our mix of earnings between jurisdictions with lower tax rates and those with higher tax rates, as well as our ability to fully benefit tax losses; other potential tax exposures; inability to achieve future investment returns that equal or exceed past returns; the unpredictability of, and fluctuation in, the trading price of our Common Shares; work stoppages and labour relations disputes; changes in credit ratings assigned to us; changes in laws and governmental regulations; costs associated with compliance with environmental laws and regulations; and other factors set out in our Annual Information Form filed with securities commissions in Canada and our annual report on Form 40-F filed with the United States Securities and Exchange Commission, and subsequent filings. In evaluating forward-looking statements, we caution readers not to place undue reliance on any forward-looking statements and readers should specifically consider the various factors which could cause actual events or results to differ materially from those indicated by such forward-looking statements. Unless otherwise required by applicable securities laws, we do not intend, nor do we undertake any obligation, to update or revise any forward-looking statements to reflect subsequent information, events, results or circumstances or otherwise.

For further information about Magna, please see our website at www.magna.com. Copies of financial data and other publicly filed documents are available through the internet on the Canadian Securities Administrators' System for Electronic Document Analysis and Retrieval (SEDAR) which can be accessed at www.sedar.com and on the United States Securities and Exchange Commission's Electronic Data Gathering, Analysis and Retrieval System (EDGAR) which can be accessed at www.sec.gov

MAGNA INTERNATIONAL INC.
Management's Discussion and Analysis of Results of Operations and Financial Position

Unless otherwise noted, all amounts in this Management's Discussion and Analysis of Results of Operations and Financial Position ("MD&A") are in U.S. dollars and all tabular amounts are in millions of U.S. dollars, except per share figures, which are in U.S. dollars. When we use the terms "we", "us", "our" or "Magna", we are referring to Magna International Inc. and its subsidiaries and jointly controlled entities, unless the context otherwise requires.

This MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the three months and year ended December 31, 2012 included in this press release, and the audited consolidated financial statements and MD&A for the year ended December 31, 2011 included in our 2011 Annual Report to Shareholders.

This MD&A has been prepared as at February 28, 2013.

OVERVIEW

We are a leading global automotive supplier with 313 manufacturing operations and 88 product development, engineering and sales centres in 29 countries. Our 119,000 employees are focused on delivering superior value to our customers through innovative processes and World Class Manufacturing. Our product capabilities include body, chassis, interiors, exteriors, seating, powertrain, electronics, mirrors, closures and roof systems and modules, as well as complete vehicle engineering and contract manufacturing. Our common shares trade on the Toronto Stock Exchange (MG) and the New York Stock Exchange (MGA). We follow a corporate policy of functional and operational decentralization, pursuant to which we conduct our operations through divisions, each of which is an autonomous business unit operating within pre-determined guidelines.

HIGHLIGHTS

Operations

Global light vehicle production increased in 2012, representing the third straight year of production growth. In our two primary markets, North American light vehicle production increased 18% to 15.5 million units, while Western European light vehicle production declined 7% to 12.7 million units.

Our 2012 total sales were a record $30.84 billion, an increase of 7% over 2011. North American, European and Rest of World production sales, as well as tooling and other sales all increased to record levels in 2012, while complete vehicle assembly sales declined 5% in 2012, compared to 2011.

Income from operations before income taxes for 2012 was a record $1.75 billion for 2012, compared to $1.22 billion for 2011. Excluding other expense (income), net, ("Other Expense" or "Other Income") income from operations before income taxes increased $269 million. Operating margin earned on the higher sales as well as a higher operating margin percentage of sales were the primary reasons for the $269 million increase over 2011.

In our North America segment, our strong performance across operating units continued in 2012. Total sales increased 10% over 2011 to $16.34 billion, driven by the higher North American light vehicle production, and Adjusted EBIT(1) increased 11% as compared to 2011 to $1.52 billion.

In our Europe segment, we increased total sales by $153 million to $12.71 billion, despite the 7% decline in Western European vehicle production. This reflects the continued resilient sales and production performance of our largest OEM customers in Europe. We reported Adjusted EBIT in our Europe segment of $165 million for 2012, compared to a loss of $22 million for 2011. Better results at certain underperforming operations were the primary driver of improved earnings in Europe.

Over the past number of years, we have experienced significant growth in our Rest of World segment. Our operations in this segment that are established and have reached an appropriate level of capacity utilization, for the most part, generate positive EBIT. However, there are a number of factors that are currently more than offsetting the aggregate results from our established operations. In our Rest of World segment, we reported an Adjusted EBIT loss of $28 million for 2012, compared to Adjusted EBIT of $56 million for 2011. Costs related to the large number of facilities under construction or launching in Asia and South America, operating inefficiencies and other costs in certain operations in South America, and the integration of acquisitions in South America were the primary reasons for the decline in Adjusted EBIT during 2012 compared to 2011.

____________________________
1 Adjusted EBIT represents income from operations before income taxes; interest expense (income), net; and other expense (income), net

Investments

In 2012, we once again made significant investments in our business, totalling $1.92 billion, including fixed assets, investments, other assets and acquisitions.

Our fixed asset spending in 2012 was an all-time high $1.27 billion, as we continued to invest both in our traditional markets and to further expand our footprint in growing regions such as Asia, Eastern Europe and South America. Furthermore, we spent $122 million for investments and other assets.

Lastly, in 2012 we invested $525 million in acquisitions to enhance our capabilities.

In January 2012 we acquired BDW technologies group ("BDW"), a structural casting supplier of aluminium components, which has operations in Germany, Poland and Hungary. BDW provides us with high-pressure casting capabilities that can provide meaningful weight savings to our customers.

We strengthened our position in automotive pumps through two acquisitions. In November, we acquired ixetic Verwaltungs GmbH ("ixetic"), a manufacturer of automotive vacuum, engine and transmission pumps with two manufacturing facilities in Germany and one in each of Bulgaria and China. In addition, we acquired the remaining 50% interest in STT Technologies ("STT") from our joint venture partner. STT is a leading supplier of transmission and engine related oil pumps serving the North American market. We believe the automotive pump market will continue to grow, partly as a result of the global trend towards improved fuel efficiency. The combined cost of these acquisitions was $437 million.

We also acquired the controlling 27% interest in Magna E-Car Systems partnership ("E-Car"), and integrated the former E-Car operations into our existing operating units. E-Car's component business was integrated into our Magna Powertrain operation, in order to take advantage of opportunities for the electrification of vehicle powertrains and E-Car's battery pack business and vehicle integration operations were integrated into our Magna Steyr operating unit.

Dividends

In 2012, aggregate dividends paid to shareholders amounted to $252 million.

On February 28, 2013 our Board of Directors declared a dividend of U.S. $0.32 per share, representing an increase of 16% over the third quarter of 2012 dividend.

Normal Course Issuer Bid

In November 2012 our Board of Directors approved a normal course issuer bid to purchase up to 12 million of our issued and outstanding Common Shares, representing 5.2% of our public float of Common Shares. The normal course issuer bid will terminate in November 2013.

Going Forward

We expect another year of strong light vehicle production in North America, driven by the ongoing strengthening of North American auto sales. In addition, we expect continued solid operating performance in our North America segment.

We remain cautious about the macroeconomic environment in Europe, and expect Western Europe light vehicle production in 2013 to decline relative to 2012, representing the second straight year of decline. In addition, certain of our OEM customers have announced plant closures in Europe, and similar announcements by other customers and their European operations are possible. We have been taking, and will continue to take, restructuring actions in Europe, reflecting both our ongoing strategic assessment of our business and in response to OEM facility actions. During 2013, we expect to record additional restructuring charges of approximately $150 million. We do expect our restructuring and other operational improvement plans to yield improved operating results in Europe over time.

We expect to generate improved results in our Rest of World segment, driven by lower new facility costs, as we launch new facilities, as well as by actions we are taking to increase operational efficiencies and integrate previous acquisitions in South America.

FINANCIAL RESULTS SUMMARY

During 2012, we posted sales of $30.84 billion, an increase of 7% from 2011. This higher sales level was a result of increases in our North American, Rest of World and European production sales and tooling, engineering and other sales partially offset by a decrease in our complete vehicle assembly sales. Comparing 2012 to 2011:

  • North American vehicle production increased 18% and our North American production sales increased 10% to $15.34 billion;
  • Western European vehicle production decreased 7% while our European production sales increased 2% to 8.79 billion;
  • Rest of World production sales increased 31% to $1.84 billion;
  • Complete vehicle assembly sales declined 5% to $2.56 billion, as complete vehicle assembly volumes decreased 5%; and
  • Tooling, engineering and other sales increased by 12% to $2.32 billion.

During 2012, we earned income from operations before income taxes of $1.75 billion compared to $1.22 billion for 2011. Excluding Other Income and Expense recorded in 2012 and 2011, as discussed in the "Other Income" section, the $269 million increase in income from operations before income taxes was primarily as a result of:

  • margins earned on higher production sales;
  • incremental margin earned on new programs that launched during or subsequent to 2011;
  • productivity and efficiency improvements at certain facilities;
  • lower costs incurred in preparation for upcoming launches;
  • higher equity income;
  • a $15 million revaluation gain in respect of asset-backed commercial paper ("ABCP");
  • the recovery of due diligence costs;
  • favourable settlement of certain commercial items;
  • lower warranty costs of $3 million; and
  • lower stock-based compensation.

These factors were partially offset by:

  • increased pre-operating costs incurred at new facilities;
  • intangible asset amortization of $52 million related to the acquisition and re-measurement of E-Car;
  • programs that ended production during or subsequent to 2011;
  • a larger amount of employee profit sharing;
  • higher incentive compensation;
  • rising commodity costs;
  • the loss on disposal of an investment;
  • operational inefficiencies and other costs at certain facilities; and
  • net customer price concessions subsequent to 2011.

During 2012, net income of $1.43 billion increased $411 million compared to 2011. Net income was impacted by Other Income and Expense, as discussed in the "Other Income" section and by the valuation allowances as discussed in the "Income Taxes" section. Other Income positively impacted net income in 2012 by $84 million and Other Expense negatively impacted net income in 2011 by $155 million, while the valuation allowances as discussed in the "Income Taxes" section positively impacted net income in 2012 by $89 million and in 2011 by $78 million. Excluding Other Income and Expense, after tax, and the valuation allowances as discussed in the "Income Taxes" section, net income for 2012 increased $161 million.

During 2012, our diluted earnings per share increased $1.89 to $6.09 for 2012 compared to $4.20 for 2011. Other Income, after tax, positively impacted diluted earnings per share in 2012 by $0.35 and Other Expense, after tax, negatively impacted diluted earnings per share in 2011 by $0.65, both as discussed in the "Other Income" section, while the valuation allowances as discussed in the "Income Taxes" section positively impacted diluted earnings per share in 2012 and 2011 by $0.38 and $0.32, respectively. Excluding Other Income and Expense, after tax, and the valuation allowances as discussed in the "Income Taxes" section, the $0.83 increase in diluted earnings per share is a result of the increase in net income attributable to Magna International Inc. and a decrease in the weighted average number of diluted shares outstanding during 2012. The decrease in the weighted average number of diluted shares outstanding was primarily due to the repurchase and cancellation of Common Shares, during or subsequent to 2011, pursuant to our normal course issuer bids and the cashless exercise of options.

INDUSTRY TRENDS AND RISKS

A number of general trends which have been impacting the automotive industry and our business in recent years are expected to continue, including the following:

  • the consolidation of vehicle platforms and proliferation of high-volume platforms supporting multiple vehicles and produced in multiple locations;

  • the long-term growth of the automotive industry in China, India and other high-growth/low cost markets, including accelerated movement of component and vehicle design, development, engineering and manufacturing to certain of these markets;

  • the growth of the A to C vehicle segments (micro to compact cars), particularly in developing markets;

  • the extent to which innovation in the automotive industry is being driven by governmental regulation of fuel economy and emissions, vehicle recyclability and vehicle safety;

  • the growth of cooperative alliances and arrangements among competing automotive OEMs, including shared purchasing of components; joint engine, powertrain and/or platform development; engine, powertrain and platform sharing; and joint vehicle hybridization and electrification initiatives and other forms of cooperation;

  • the consolidation of automotive suppliers; and

  • the ongoing exertion of pricing pressure by OEMs.

The following are some of the more significant risks that could affect our ability to achieve our desired results:

  • The global automotive industry is cyclical. A worsening of economic and political conditions, including through rising interest rates or inflation, high unemployment, increasing energy prices, declining real estate values, increased volatility in global capital markets, international conflicts, sovereign debt concerns, the potential for a "currency war", an increase in protectionist measures and/or other factors, may result in lower consumer confidence, which has a significant impact on consumer demand for vehicles. Vehicle production is closely related to consumer demand and thus vehicle production. A significant decline in production volumes from current levels could have a material adverse effect on our profitability.

  • The European automotive industry continues to experience significant overcapacity, elevated levels of vehicle inventory, reduced consumer demand for vehicles and depressed production volumes and sales levels. In response to these conditions, some OEMs have announced plans to restructure their European operations, including through plant closures, while other OEMs may take similar actions. In light of the prevailing conditions in Europe, in addition to planned actions, we may take additional restructuring or downsizing actions. In such an event, we may incur restructuring, downsizing and/or other significant non-recurring costs in our European operations, which could have a material adverse effect on our profitability.

  • A majority of our European sales are to three German-based OEMs - BMW, Volkswagen Group and Daimler. In recent quarters, these three customers have outperformed the Western European automotive market despite the recession in Europe, due in part to strong demand for their vehicles in Asia and North America. A deterioration of the sales of one or more of our three largest German-based customers could have a material adverse effect on our sales and profitability.

  • In light of the amount of business we currently have with our largest customers in certain regions, our opportunities for incremental growth with these customers may be limited. The amount of business we have with Asian-based OEMs, including Toyota, Honda, Nissan and Hyundai/Kia, generally lags that of our largest customers, due in part to the existing relationships between such Asian-based OEMs and their preferred suppliers. There is no certainty that we can achieve growth with Asian-based OEMs, nor that any such growth will offset slower growth we may experience with our largest customers. Our inability to sustain or grow our business with OEMs could have a material adverse effect on our profitability.

  • Although we are working to turn around financially underperforming operating divisions, there is no guarantee that we will be successful in doing so in the short to medium term. The continued underperformance of one or more operating divisions could have a material adverse effect on our profitability and operations.

  • It is likely that we may downsize, close or sell some of our operating divisions. By taking such actions, we may incur restructuring, downsizing and/or other significant non-recurring costs. These costs may be higher in some countries than others and could have a material adverse effect on our short-term profitability.

  • The launch of new business is a complex process, the success of which depends on a wide range of factors, including the production readiness of our and our suppliers' manufacturing facilities and manufacturing processes, as well as factors related to tooling, equipment, employees, initial product quality and other factors. Our failure to successfully launch material new or takeover business could have an adverse effect on our profitability.

  • We believe we will have sufficient available cash to successfully execute our business plan, even in the event of another global recession similar to that of 2008-2009. However, uncertain economic conditions create significant planning risks for us. The occurrence of an economic shock not contemplated in our business plan, a rapid deterioration of economic conditions or a more prolonged recession than that experienced in 2008-2009 could result in the depletion of our cash resources, which could have a material adverse effect on our operations and financial condition.

  • While the North American automotive industry appears to have stabilized following the 2008-2009 recession, there is no certainty regarding the long-term financial health of our customers and suppliers. The bankruptcy or insolvency of a major customer or supplier to us could have a material adverse effect on our profitability.

  • A disruption in the supply of components to us from our suppliers could cause the temporary shut-down of our or our customers' production lines. Any prolonged supply disruption, including due to the inability to re-source or in-source production, could have a material adverse effect on our profitability.

  • Some of our manufacturing facilities are unionized, as are many manufacturing facilities of our customers and suppliers. Unionized facilities are subject to the risk of labour disruptions from time to time. A significant labour disruption could lead to a lengthy shutdown of our or our customers' and/or our suppliers' production lines, which could have a material adverse effect on our operations and profitability.

  • The automotive supply industry is highly competitive. As a result of our diversified automotive business, some competitors in each of our product capabilities have greater market share than we do. Failure to successfully compete with existing or new competitors could have an adverse effect on our operations and profitability.

  • We depend on the outsourcing of components, modules and assemblies, as well as complete vehicles, by OEMs. The extent of OEM outsourcing is influenced by a number of factors, including: relative cost, quality and timeliness of production by suppliers as compared to OEMs; capacity utilization; OEMs' perceptions regarding the strategic importance of certain components/modules to them; labour relations among OEMs, their employees and unions; and other considerations. A reduction in outsourcing by OEMs, or the loss of any material production or assembly programs combined with the failure to secure alternative programs with sufficient volumes and margins, could have a material adverse effect on our profitability.

  • Contracts from our customers consist of blanket purchase orders which generally provide for the supply of components for a customer's annual requirements for a particular vehicle, instead of a specific quantity of products. These blanket purchase orders can be terminated by a customer at any time and, if terminated, could result in our incurring various pre-production, engineering and other costs which we may not recover from our customer and which could have an adverse effect on our profitability.

  • We continue to invest in technology and innovation which we believe will be critical to our long-term growth. Our ability to anticipate changes in technology and to successfully develop and introduce new and enhanced products and/or manufacturing processes on a timely basis will be a significant factor in our ability to remain competitive. If there is a shift away from the use of technologies in which we are investing, our costs may not be fully recovered. We may be placed at a competitive disadvantage if other technologies emerge as industry-leading technologies, which could have a material adverse effect on our profitability and financial condition.

  • The failure of any major financial institutions in the future could adversely affect our ability, as well as our customers' and suppliers' ability, to access liquidity needed to support our operating activities. Additionally, the failure of a financial institution in which we invest our cash reserves or that is a counterparty in a derivatives transaction (primarily currency and commodities hedges) with us, could increase the risk that our cash reserves and amounts owing to us pursuant to derivative transactions may not be fully recoverable. Any of these risks could have an adverse effect on our financial condition.

  • We recorded significant impairment charges related to goodwill, long-lived assets and future tax assets in recent years and may continue to do so in the future. The early termination, loss, renegotiation of the terms of, or delay in the implementation of, any significant production contract could be indicators of impairment. In addition, to the extent that forward-looking assumptions regarding: the impact of turnaround plans on underperforming operations; new business opportunities; program price and cost assumptions on current and future business; the timing and success of new program launches; and forecast production volumes; are not met, any resulting impairment loss could have a material adverse effect on our profitability.

  • Although we supply parts to all of the leading OEMs, a significant majority of our sales are to six such customers. While we have diversified our customer base somewhat in recent years and continue to attempt to further diversify, there is no assurance we will be successful. Shifts in market share away from our top customers could have a material adverse effect on our profitability.

  • While we supply parts for a wide variety of vehicles produced globally, we do not supply parts for all vehicles produced, nor is the number or value of parts evenly distributed among the vehicles for which we do supply parts. Shifts in market shares among vehicles or vehicle segments, particularly shifts away from vehicles on which we have significant content and shifts away from vehicle segments in which our sales may be more heavily concentrated, could have a material adverse effect on our profitability.

  • While we continue to expand our manufacturing footprint with a view to taking advantage of manufacturing opportunities in markets such as China, India, South America and other non-traditional markets for us, we cannot guarantee that we will be able to fully realize such opportunities. Additionally, the establishment of manufacturing operations in new markets carries its own risks, including those relating to political and economic instability; high inflation and our ability to recover inflation-related cost increases; trade, customs and tax risks; expropriation risks; currency exchange rates; currency controls; limitations on the repatriation of funds; insufficient infrastructure; and other risks associated with conducting business internationally. Expansion of our business in non-traditional markets is an important element of our strategy and, as a result, our exposure to the risks described above may be greater in the future. The likelihood of such occurrences and their potential effect on us vary from country to country and are unpredictable, however, the occurrence of any such risks could have an adverse effect on our operations, financial condition and profitability.

  • Prices for certain key raw materials and commodities used in our parts, including steel and resin, continue to be volatile. To the extent we are unable to offset commodity price increases by passing commodity price increases to our customers, by engineering products with reduced commodity content, through hedging strategies, or otherwise, such additional commodity costs could have an adverse effect on our profitability.

  • Although our financial results are reported in U.S. dollars, a significant portion of our sales and operating costs are realized in Canadian dollars, euros, British pounds and other currencies. Our profitability is affected by movements of the U.S. dollar against the Canadian dollar, the euro, the British pound and other currencies in which we generate revenues and incur expenses. Significant long-term fluctuations in relative currency values, in particular a significant change in the relative values of the U.S. dollar, Canadian dollar, euro or British pound, could have an adverse effect on our profitability and financial condition and any sustained change in such relative currency values could adversely impact our competitiveness in certain geographic regions.

  • We have completed a number of acquisitions and may continue to do so in the future. In those product areas in which we have identified acquisitions as a key aspect of our business strategy, we may not be able to identify suitable acquisition targets or successfully acquire any suitable targets which we identify. Additionally, we may not be able to successfully integrate or achieve anticipated synergies from those acquisitions which we do complete, which could have a material adverse effect on our profitability.

  • Although we seek to conduct appropriate levels of due diligence of our acquisition targets, these efforts may not always prove to be sufficient in identifying all risks and liabilities related to the acquisition, including as a result of limited access to information, time constraints for conducting due diligence, inability to access target company plants and/or personnel or other limitations on the due diligence process. As a result, we may become subject to liabilities or risks not discovered through our due diligence efforts, which could have a material adverse effect on our profitability.

  • We face ongoing pricing pressure, as well as pressure to absorb costs related to product design, engineering and tooling, as well as other items previously paid for directly by OEMs. Our inability to fully offset price concessions or costs previously paid for by OEMs could have an adverse effect on our profitability.

  • Our customers continue to demand that we bear the cost of the repair and replacement of defective products which are either covered under their warranty or are the subject of a recall by them. Warranty provisions are established based on our best estimate of the amounts necessary to settle existing or probable claims on product defect issues. Recall costs are costs incurred when government regulators and/or our customers decide to recall a product due to a known or suspected performance issue and we are required to participate either voluntarily or involuntarily. Currently, under most customer agreements, we only account for existing or probable warranty claims. Under certain complete vehicle engineering and assembly contracts, we record an estimate of future warranty-related costs based on the terms of the specific customer agreements and the specific customer's warranty experience. While we possess considerable historical warranty and recall data and experience with respect to the products we currently produce, we have little or no warranty and recall data which allows us to establish accurate estimates of, or provisions for, future warranty or recall costs relating to new products, assembly programs or technologies being brought into production. The obligation to repair or replace such products could have a material adverse effect on our profitability and financial condition.

  • Our manufacturing facilities are subject to risks associated with natural disasters, including fires, floods, hurricanes and earthquakes. The occurrence of any of these disasters could cause the total or partial destruction of a manufacturing facility, thus preventing us from supplying products to our customers and disrupting production at their facilities for an indeterminate period of time. The inability to promptly resume the supply of products following a natural disaster at a manufacturing facility could have a material adverse effect on our operations and profitability.

  • Some of our current and former employees in Canada and the United States participate in defined benefit pension plans. Although these plans have been closed to new participants, existing participants in Canada continue to accrue benefits. Our defined benefit pension plans are not fully funded and our pension funding obligations could increase significantly due to a reduction in the funding status caused by a variety of factors, including: weak performance of capital markets; declining interest rates; failure to achieve sufficient investment returns; investment risks inherent in the investment portfolios of the plans; and other factors. A significant increase in our pension funding obligations could have an adverse effect on our profitability and financial condition.

  • From time to time, we may become involved in regulatory proceedings, or become liable for legal, contractual and other claims by various parties, including customers, suppliers, former employees, class action plaintiffs and others. On an ongoing basis, we attempt to assess the likelihood of any adverse judgments or outcomes to these proceedings or claims, although it is difficult to predict final outcomes with any degree of certainty. Except as disclosed from time to time in our consolidated financial statements, we do not believe that any of the proceedings or claims to which we are party will have a material adverse effect on our financial position; however, we cannot provide any assurance to this effect.

  • We continue to pursue opportunities in areas that are complementary to our existing automotive design, engineering and manufacturing capabilities all in order to more efficiently use our capital assets, technological know-how and manufacturing capacity. Many "non-automotive" industries are subject to some of the same types of risks as our automotive business, including: sensitivity to economic conditions, cyclicality and technology risks. We also face a diverse number of competitors possessing varying degrees of financial and operational strength and experience in their industry. Failure to adequately understand the non-automotive businesses in which we pursue opportunities, including with respect to warranty issues, pricing and other factors, could have an adverse effect on our operations and profitability.

  • In recent years, we have invested significant amounts of money in our business through capital expenditures to support new facilities, expansion of existing facilities, purchases of production equipment and acquisitions. Returns achieved on such investments in the past are not necessarily indicative of the returns we may achieve on future investments and our inability to achieve returns on future investments which equal or exceed returns on past investments could have a material adverse effect on our profitability.

  • Trading prices of our Common Shares cannot be predicted and may fluctuate significantly due to a variety of factors, many of which are outside our control, including: general economic and stock market conditions; variations in our operating results and financial condition; differences between our actual operating and financial results and those expected by investors and stock analysts; changes in recommendations made by stock analysts, whether due to factors relating to us, our customers, the automotive industry or otherwise; significant news or events relating to our primary customers, including the release of vehicle production and sales data; investor and stock analyst perceptions about the prospects for our or our primary customers' respective businesses or the automotive industry; and other factors.

RESULTS OF OPERATIONS

Average Foreign Exchange                                        
        For the three months       For the year
        ended December 31,         ended December 31,
        2012     2011     Change       2012     2011     Change
1 Canadian dollar equals U.S. dollars        1.010     0.978     + 3%       1.001     1.012     - 1%
1 euro equals U.S. dollars        1.298     1.349     - 4%       1.286     1.392     - 8%
1 British pound equals U.S. dollars        1.607     1.572     + 2%       1.585     1.604     - 1%
                                         

The preceding table reflects the average foreign exchange rates between the most common currencies in which we conduct business and our U.S. dollar reporting currency. The significant changes in these foreign exchange rates for the three months and year ended December 31, 2012 impacted the reported U.S. dollar amounts of our sales, expenses and income.

The results of operations whose functional currency is not the U.S. dollar are translated into U.S. dollars using the average exchange rates in the table above for the relevant period. Throughout this MD&A, reference is made to the impact of translation of foreign operations on reported U.S. dollar amounts where relevant.

Our results can also be affected by the impact of movements in exchange rates on foreign currency transactions (such as raw material purchases or sales denominated in foreign currencies). However, as a result of hedging programs employed by us, foreign currency transactions in the current period have not been fully impacted by movements in exchange rates. We record foreign currency transactions at the hedged rate where applicable.

Finally, holding gains and losses on transactions occurring in a currency other than an operation's functional currency, which are recorded in selling, general and administrative expenses, impact reported results.

RESULTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2012

Sales                        
        For the year       
        ended December 31,      
          2012        2011      Change
Vehicle Production Volumes (millions of units)                        
  North America          15.471        13.137     + 18%
  Western Europe          12.689        13.671     - 7%
Sales                        
  External Production                        
    North America        $ 15,336     $  13,940     + 10%
    Europe           8,786         8,651      + 2%
    Rest of World           1,837         1,402     + 31%
  Complete Vehicle Assembly           2,561        2,690      - 5%
  Tooling, Engineering and Other           2,317        2,065     + 12%
Total Sales        $ 30,837     $  28,748      + 7%
                     

External Production Sales - North America

External production sales in North America increased 10% or $1.40 billion to $15.34 billion for 2012 compared to $13.94 billion for 2011. The increase in external production sales is primarily as a result of:

  • higher production volumes on certain existing programs;
  • the launch of new programs during or subsequent to 2011, including the:
    • Volkswagen Passat;
    • Mercedes-Benz M-Class and GL-Class;
    • Chevrolet Sonic; and
    • Dodge Dart;
  • acquisitions completed during or subsequent to 2011, which positively impacted sales by $69 million; and
  • an increase in content on certain programs.

These factors were partially offset by:

  • a decrease in content on certain programs, including the:
    • Ford Escape; and
    • Ram Pickup;
  • programs that ended production during or subsequent to 2011, including the:
    • Ford Crown Victoria and Mercury Grand Marquis;
    • Chevrolet HHR;
    • Ford Ranger; and
    • Dodge Caliber;
  • a decrease in reported U.S. dollar sales due to the weakening of the Canadian dollar against the U.S. dollar; and
  • net customer price concessions subsequent to 2011.

External Production Sales - Europe

External production sales in Europe increased $135 million to $8.79 billion for 2012 compared to $8.65 billion for 2011. The increase in external production sales is primarily as a result of:

  • the launch of new programs during or subsequent to 2011, including the:
    • Range Rover Evoque;
    • Kia Rio;
    • Volkswagen up!, SEAT Mii and Skoda Citigo;
    • Hyundai Solaris;
    • Audi Q3; and
    • Mercedes-Benz B-Class;
  • acquisitions completed during or subsequent to 2011, which positively impacted sales by $245 million, including BDW and ixetic; and
  • an increase in content on certain programs.

These factors were partially offset by:

  • a decrease in reported U.S. dollar sales primarily as a result of the weakening of the euro against the U.S. dollar;
  • lower production volumes on certain existing programs;
  • a decrease in content on certain programs;
  • programs that ended production during or subsequent to 2011; and
  • net customer price concessions subsequent to 2011.

External Production Sales - Rest of World

External production sales in Rest of World increased 31% or $435 million to $1.84 billion for 2012 compared to $1.40 billion for 2011, primarily as a result of:

  • acquisitions completed during or subsequent to 2011, which positively impacted sales by $251 million, including ThyssenKrupp Automotive Systems Industrial do Brasil Ltda; ("TKASB");
  • the launch of new programs during or subsequent to 2011, primarily in Brazil and China; and
  • an increase in content on certain programs.

These factors were partially offset by a $108 million decrease in reported U.S. dollar sales as a result of the weakening of foreign currencies against the U.S. dollar, including the Brazilian real.

Complete Vehicle Assembly Sales                        
        For the year      
        ended December 31,      
          2012        2011      Change
Complete Vehicle Assembly Sales        $  2,561     $  2,690      - 5%
Complete Vehicle Assembly Volumes (Units)                        
  MINI Countryman, Mercedes-Benz G-Class, Peugeot RCZ                        
  MINI Paceman and Aston Martin Rapide          123,602       130,343      - 5%
                           

Complete vehicle assembly sales decreased 5% or $129 million to $2.56 billion for 2012 compared to $2.69 billion for 2011 while assembly volumes decreased 5% or 6,741 units.

The decrease in complete vehicle assembly sales is primarily as a result of:

  • a $202 million decrease in reported U.S. dollar sales as a result of the weakening of the euro against the U.S. dollar;
  • a decrease in assembly volumes for the Peugeot RCZ; and
  • the end of production of the Aston Martin Rapide at our Magna Steyr facility during the second quarter of 2012.

These factors were partially offset by:

  • an increase in assembly volumes for the:
    • Mercedes-Benz G-Class; and
    • MINI Countryman; and
  • the launch of the MINI Paceman during the fourth quarter of 2012.

Tooling, Engineering and Other Sales

Tooling, engineering and other sales increased 12% or $252 million to $2.32 billion for 2012 compared to $2.07 billion for 2011.

In 2012, the major programs for which we recorded tooling, engineering and other sales were the:

  • Ford Fusion;
  • MINI Countryman;
  • Mercedes-Benz M-Class;
  • Chevrolet Trax;
  • QOROS C/Sedan/Hatch;
  • Opel Cascada Convertible;
  • Chevrolet Spin;
  • Ford Escape;
  • Infiniti hatchback program;
  • Dodge Dart; and
  • Ford Transit.

In 2011, the major programs for which we recorded tooling, engineering and other sales were the:

  • MINI Countryman;
  • Mercedes-Benz M-Class;
  • Opel Calibra;
  • Chery A6 Coupe;
  • Chrysler 300C, Dodge Charger and Challenger;
  • BMW X3;
  • Peugeot RCZ;
  • Ford Fusion;
  • Dodge Journey;
  • Skoda Fabia; and
  • Chevrolet Camaro.

In addition, tooling, engineering and other sales were negatively impacted by the weakening of the euro against the U.S. dollar.

Cost of Goods Sold and Gross Margin                      
            For the year
            ended December 31,
              2012        2011
Sales            $  30,837     $  28,748
Cost of goods sold                      
  Material               19,706        18,533
  Direct labour               2,044        1,912
  Overhead               5,260         4,989
              27,010         25,434
Gross margin            $  3,827     $  3,314
Gross margin as a percentage of sales              12.4%        11.5%
                       

Cost of goods sold increased $1.58 billion to $27.01 billion for 2012 compared to $25.43 billion for 2011 primarily as a result of:

  • higher material, overhead and labour costs associated with the increase in sales, including wage increases at certain operations;
  • $552 million related to acquisitions completed during or subsequent to 2011, including TKASB and BDW;
  • a larger amount of employee profit sharing; and
  • rising commodity costs.

These factors were partially offset by:

  • a decrease in reported U.S. dollar cost of goods sold primarily due to the weakening of the euro, Brazilian real, Canadian dollar and Czech koruna, each against the U.S. dollar; and
  • lower warranty costs of $3 million.

Gross margin increased $513 million to $3.83 billion for 2012 compared to $3.31 billion for 2011 and gross margin as a percentage of sales increased to 12.4% for 2012 compared to 11.5% for 2011. The increase in gross margin as a percentage of sales was substantially due to:

  • lower costs incurred in preparation for upcoming launches;
  • favourable settlement of certain commercial items;
  • lower warranty costs; and
  • productivity and efficiency improvements at certain facilities.

These factors were partially offset by:

  • increased pre-operating costs incurred at new facilities;
  • an increase in tooling, engineering and other sales that have low or no margins;
  • rising commodity costs;
  • a larger amount of employee profit sharing;
  • operational inefficiencies and other costs at certain facilities; and
  • net customer price concessions subsequent to 2011.

Depreciation and Amortization

Depreciation and amortization costs increased $115 million to $801 million for 2012 compared to $686 million for 2011. The higher depreciation and amortization was primarily as a result of:

  • intangible asset amortization of $52 million related to the acquisition and re-measurement of E-Car;
  • $48 million related to acquisitions completed during or subsequent to 2011, including BDW, TKASB and E-Car;
  • capital spending during or subsequent to 2011; and
  • depreciation related to new facilities.

These factors were partially offset by a decrease in reported U.S. dollar depreciation and amortization due to the weakening of the euro, Brazilian real and Canadian dollar, each against the U.S. dollar.

Selling, General and Administrative ("SG&A")

SG&A expense as a percentage of sales was 4.9% for 2012 compared to 4.8% for 2011. SG&A expense increased $137 million to $1.52 billion for 2012 compared to $1.38 billion for 2011 primarily as a result of:

  • $78 million related to acquisitions completed during or subsequent to 2011, including TKASB, BDW, E-Car and ixetic;
  • higher labour, including wage increases at certain operations, and other costs to support the growth in sales;
  • higher incentive compensation;
  • increased costs incurred at new facilities;
  • a loss on disposal of an investment; and
  • higher employee profit sharing.

These factors were partially offset by:

  • a decrease in reported U.S. dollar SG&A due to the weakening of the euro, Brazilian real, Czech koruna and Polish zloty, each against the U.S. dollar;
  • a $15 million revaluation gain in respect of ABCP; and
  • the recovery of due diligence costs.

Equity Income

Equity income increased $30 million to $151 million for 2012 compared to $121 million for 2011. Excluding the $31 million reduction in the equity loss related to E-Car, the $1 million decrease in equity income is primarily as a result of the disposal of an equity accounted investment during 2011 partially offset by higher income from most of our equity accounted investments.

Other (Income) Expense, net

During 2012 and 2011, we recorded Other Income and Expense items as follows:

          2012       2011 











Operating
Income







Net
Income






Diluted
Earnings
per Share







Operating
Income







Net
Income






Diluted
Earnings
per Share
Fourth Quarter                                                  
  Re-measurement gain of STT (1)        $ (35)     $  (35)     $   (0.15)     $  —     $  —     $
  Impairment charges (2)           25         23          0.10         21         20         0.08
  Restructuring charges (2)           55         53          0.23         —         —         —
  Loss on disposal of facility (3)                   —          —         16         16         0.07
  Customer bankruptcy (4)                   —          —         11         11         0.05
  Insurance proceeds (5)                   —          —         (15)         (15)         (0.06)
          45         41         0.18         33         32         0.14
Third Quarter                                                  
  Re-measurement gain of E-Car (1)           (153)         (125)          (0.53)         —         —         —
  Loss on disposal of facility (3)                   —          —         113         113         0.47
  Settlement agreement (6)                   —          —         11         11         0.05
          (153)         (125)         (0.53)         124         124         0.52
Second Quarter                                                  
  Gain on disposal (7)                   —          —         (10)         (10)         (0.04)
First Quarter                                                  
  Write down of real estate (8)                   —         —         9         9         0.04
                                                   
Total full year other (income)                                                  
  expense, net        $ (108)     $  (84)     $   (0.35)     $  156     $  155     $  0.65
                                                   

(1) Re-measurement gains

(i)    STT Technologies Inc.

On October 26, 2012, we acquired the remaining 50% interest in STT for cash consideration of $55 million net of $13 million cash acquired. STT is a manufacturer of automotive pumps with operations in Canada and Mexico. Prior to the acquisition, we accounted for this investment using the equity method of accounting.

The incremental investment in STT was accounted for under the business acquisition method of accounting as a step acquisition which requires that we re-measure our pre-existing investment in STT at a fair value and recognize any gains or losses in income. The estimated fair value of our investment immediately before the closing date was $55 million, which resulted in the recognition of a non-cash gain of $35 million.

(ii) Magna E-Car Systems LP

On August 31, 2012, we acquired the controlling 27% interest in E-Car from a company affiliated with the Stronach Group for cash consideration of $75 million. The purchase was reviewed, negotiated and approved by our independent directors with the benefit of independent legal advice from Fasken Martineau DuMoulin LLP, independent financial advice from TD Securities Inc. ("TD") and an independent valuation prepared by PricewaterhouseCoopers LLP ("PwC"). The purchase price represents the midpoint of the valuation range determined by PwC and TD delivered a fairness opinion to the independent directors to the effect that the transaction is fair, from a financial point of view, to the Company.

Prior to the acquisition, we held the remaining 73% non-controlling interest in E-Car and accounted for this investment using the equity method of accounting.

The incremental investment in E-Car was accounted for under the business acquisition method of accounting as a step acquisition. The estimated fair value of our partnership interest immediately before the closing date was $205 million, which resulted in the recognition of a non-cash gain of $153 million ($125 million after tax).

In addition, the preliminary purchase equation of the incremental investment in E-Car allocated $210 million to intangible assets. The intangible assets are primarily customer relationships and technology based intangibles. Given the continuing uncertainties regarding the timing and magnitude of a viable electric vehicle industry, competing electric vehicle technologies, significantly larger competitors, and other factors, we have determined that the intangible assets should be amortized on a straight-line basis over the period ending December 31, 2013.

(2) Restructuring and Impairment Charges

During 2012 and 2011, we recorded long-lived asset impairment charges as follows:

              2012          2011







Operating
Income




Net
Income



Operating
 Income




Net
 Income
Fourth Quarter                                          
  North America            $  2      $    1     $  7      $    7
  Europe               23           22        14          13
Total full year impairment charges            $  25      $    23      $  21      $    20
                                           

[a] For the year ended December 31, 2012

(i)     Impairments of Long-lived Assets

In conjunction with our annual business planning cycle, during the fourth quarter of 2012, we completed our annual goodwill impairment and long-lived asset analysis and recorded long-lived asset impairment charges of $25 million.

In Europe, the impairment charges related primarily to fixed assets at our exteriors and interior systems operations.

(ii)     Restructuring Costs

As a result of continuing economic uncertainty in Europe, recent customer announcements related to plant closures, the profitability of certain facilities and the level of future booked business, we determined that restructuring would have to be completed in certain European markets in order to remain cost competitive over the long-term. As a result, during the fourth quarter of 2012, we recorded restructuring charges of $55 million ($53 million after tax) in Europe primarily at our exterior and interior systems and complete vehicle and engineering services operations.

Furthermore, based on our review above and subject to commercial settlements with stakeholders, during 2013 we expect to record additional restructuring charges of approximately $150 million.

Substantially all of these restructuring costs remain to be paid subsequent to 2012.

[b] For the year ended December 31, 2011

(i)     Impairments of Long-lived Assets

In North America, we recorded impairment charges of $7 million related to a roof systems facility in the United States. In Europe, we recorded long-lived asset impairment charges of $7 million related to exteriors and interiors systems facilities, one in each of Spain and Belgium, and in Germany we recorded long-lived asset impairment charges of $7 million related to an electronics facility and a roof systems operation.

(3) Loss on disposal of facility

During the third quarter of 2011, we sold an interior systems operation located in Germany and recorded a loss on disposal of $113 million. This operation, whose long-lived assets were substantially impaired in 2010, had a history of losses which were projected to continue throughout the business planning period. Under the terms of the 2011 sale arrangements (the "SPA"), we agreed to fund the buyer $67 million, to be satisfied with certain working capital items, cash and the assumption of certain liabilities. The remaining net assets of the operation of $26 million were assigned no value by the buyer and accordingly, were expensed as part of the total loss on disposal. Simultaneously, we reached a commercial settlement with one of the facility's customers regarding the cancellation of certain production orders whereby we reimbursed the customer costs of $20 million.

Final settlement of the SPA did not occur during 2011 and in the fourth quarter of 2011 an additional $16 million was accrued in relation to the ongoing disputes with the purchaser bringing the total loss on disposal to $129 million.

As more fully described in Note 5 of our unaudited interim consolidated financial statements, on June 4, 2012, we re-acquired the above operation.

(4) Customer bankruptcy

During 2011, we recorded an $11 million charge related to the insolvency of Saab.

(5) Insurance proceeds

During 2011, we received proceeds pursuant to an insurance claim for fire damages related to an interior systems facility in the United States. The proceeds received were $15 million in excess of the damaged assets net book value and the losses previously recognized and was recorded in income.

(6) Settlement agreement

During 2011, a settlement agreement was finalized in connection with the settlement of certain patent infringement and other claims. We recorded an $11 million expense in the third quarter of 2011 in relation to these arrangements.

(7) Gain on disposal

During 2011, we sold our 40% non-controlling interest in an equity accounted investment for $151 million and realized a $10 million gain on the disposition.

(8) Write down of real estate

During 2011, five excess corporate real estate assets were sold to entities associated with our Founder and Honorary Chairman, Mr. Stronach and/or our former Co-Chief Executive Officer, Siegfried Wolf. Based on the appraisals obtained by the former Corporate Governance and Compensation Committee, the appraised fair value range for the properties was less than their carrying value and, accordingly, we recorded a $9 million impairment charge in the second quarter of 2011. The sales were approved by the independent members of our Board of Directors based on the recommendation of the former Corporate Governance and Compensation Committee and were completed during 2011.

Segment Analysis

Given the differences between the regions in which we operate, our operations are segmented on a geographic basis between North America, Europe and Rest of World. Consistent with the above, our internal financial reporting segments key internal operating performance measures between North America, Europe and Rest of World for purposes of presentation to the chief operating decision maker to assist in the assessment of operating performance, the allocation of resources, and our long-term strategic direction and future global growth.

Our chief operating decision maker uses Adjusted EBIT as the measure of segment profit or loss, since we believe Adjusted EBIT is the most appropriate measure of operational profitability or loss for our reporting segments. Adjusted EBIT represents income from operations before income taxes; interest expense (income), net; and other (income) expense, net.

As more fully described in Notes 2 and 5 of our unaudited interim consolidated financial statements for the three months and year ended December 31, 2012, on August 31, 2012 we acquired the controlling 27% interest in the E-Car partnership. Prior to the acquisition, we held the remaining 73% non-controlling interest in E-Car and accounted for this investment using the equity method of accounting. For segment reporting purposes, prior to the closing date we recorded our proportionate share of the losses of E-Car in the Corporate and Other segment. Beginning on August 31, 2012, the consolidated results of E-Car are recorded in our North America and Europe segments as follows:

          For the three months ended       For the four months ended 
          December 31, 2012       December 31, 2012 





North
America




Europe




Total



   North
America




Europe




Total
Total Sales        $  9     $  9     $  18     $  12     $  12     $  24
Adjusted EBIT        $  (59)     $  (4)     $  (63)     $  (76)     $  (6)     $  (82)
Amortization of E-car Intangibles                                                   
  included in Adjusted EBIT        $  (39)     $  —     $  (39)     $  (52)     $  —     $  (52)
                                                     

          For the year ended December 31, 
          External Sales       Adjusted EBIT
          2012        2011        Change        2012        2011       Change
North America        $  16,241     $  14,764     $  1,477     $  1,521     $  1,373     $  148
Europe           12,563         12,429         134         165         (22)         187
Rest of World           2,010         1,506         504         (28)         56         (84)
Corporate and Other           23         49         (26)         —         (40)         40
Total reportable                                                  
  segments        $  30,837     $  28,748     $  2,089     $  1,658     $ 1,367     $ 291
                                                     

Excluded from Adjusted EBIT for 2012 and 2011 were the following Other Income and Expense items, which have been discussed in the "Other Income" section.












For the year
ended December 31,
                          2012          2011
North America                                    
  Re-measurement gain of STT                      $    (35)     $    —
  Impairment charges                           2           7
  Settlement agreement                                     11
  Insurance proceeds                                     (15)
                          (33)           3
Europe                                    
  Impairment charges                           23           14
  Restructuring charges                           55           —
  Loss on disposal of facility                                     129
  Customer bankruptcy                                     11
                          78           154
Corporate and Other                                    
  Re-measurement gain of E-Car                          (153)           —
  Gain on disposal of investment                                     (10)
  Write down of real estate                                     9
                          (153)           (1)
                      $    (108)     $    156
                                     

North America

Adjusted EBIT in North America increased $148 million to $1.52 billion for 2012 compared to $1.37 billion for 2011 primarily as a result of:

  • margins earned on higher production sales, including margins earned on the launch of new facilities and new programs;
  • lower costs incurred in preparation for upcoming launches; and
  • productivity and efficiency improvements at certain facilities.

These factors were partially offset by:

  • intangible asset amortization of $52 million related to the acquisition and re-measurement of E-Car;
  • programs that ended production during or subsequent to 2011;
  • increased pre-operating costs incurred at new facilities;
  • operational inefficiencies and other costs at certain facilities;
  • higher affiliation fees paid to corporate;
  • higher warranty costs of $13 million;
  • a larger amount of employee profit sharing;
  • higher incentive compensation; and
  • net customer price concessions subsequent to 2011.

Europe

Adjusted EBIT in Europe increased $187 million to $165 million for 2012 compared to a loss of $22 million for 2011 primarily as a result of:

  • lower warranty costs of $16 million;
  • productivity and efficiency improvements at certain facilities;
  • favourable settlement of certain commercial items;
  • higher equity income; and
  • lower costs incurred in preparation for upcoming launches.

These factors were partially offset by:

  • a larger amount of employee profit sharing;
  • rising commodity costs;
  • higher affiliation fees paid to corporate;
  • programs that ended production during or subsequent to the fourth quarter of 2011;
  • higher pre-operating costs incurred at new facilities;
  • higher incentive compensation; and
  • operational inefficiencies and other costs at certain facilities.

Rest of World

Rest of World Adjusted EBIT decreased $84 million to a loss of $28 million for 2012 compared to income of $56 million for 2011 primarily as a result of:

  • higher costs related to new facilities;
  • operational inefficiencies and other costs at certain facilities, substantially at certain facilities in South America, including the inability to recover inflationary related cost increases from our customers;
  • higher affiliation fees paid to Corporate; and
  • net customer price concessions subsequent to the fourth quarter of 2011.

These factors were partially offset by:

  • higher equity income; and
  • lower launch costs.

Corporate and Other

Corporate and Other Adjusted EBIT increased $40 million to $nil for 2012 compared to a loss of $40 million for 2011. The loss related to our equity accounted investment in E-Car included in Corporate and Other was $35 million for 2012 and $66 million for 2011. Excluding E-Car, Corporate and Other Adjusted EBIT increased $9 million to $35 million for 2012 compared to $26 million for 2011 primarily as a result of:

  • an increase in affiliation fees earned from our divisions;
  • a $15 million revaluation gain in respect of ABCP;
  • the recovery of due diligence costs; and
  • lower stock-based compensation.

These factors were partially offset by:

  • higher incentive compensation;
  • lower equity income;
  • a loss on disposal of an investment; and
  • a larger amount of employee profit sharing.

Interest Expense (Income), net

During 2012, we recorded net interest expense of $16 million compared to net interest income of $6 million for 2011. The increase in interest expense is primarily as a result of:

  • an increase in interest expense as a result of higher debt in Asia Pacific and South America;
  • lower interest income; and
  • interest expense on debt assumed as part of the BDW acquisition.

Income from Operations before Income Taxes

Income from operations before income taxes increased $533 million to $1.75 billion for 2012 compared to $1.22 billion for 2011. Excluding Other Income and Expense, discussed in the "Other Income" section, income from operations before income taxes for 2012 increased $269 million. The increase in income from operations before income taxes is the result of the increase in EBIT partially offset by the increase in net interest expense, as discussed above.

Income Taxes

For the year ended December 31, 2012, we had valuation allowances against our deferred tax assets in the United Kingdom and Germany. These valuation allowances were required based on historical losses and uncertainty as to the timing of when we would be able to generate the necessary level of earnings to recover these deferred tax assets. Over the past few years, certain divisions in the United Kingdom have delivered sustained profits. Based on financial forecasts and continued anticipated growth, we released a portion of the valuation allowance set up against our deferred tax assets in the United Kingdom. The BDW and ixetic acquisitions in 2012 allowed us to release a portion of the valuation allowance set up against our German deferred tax assets. Additionally, during 2012, we released a portion of our valuation allowances in Mexico and China, which were partially offset by a new valuation allowance against all of our deferred tax assets in Brazil. The net effect of all these valuation allowance releases in 2012 is $89 million.

For the year ended December 31, 2011, we had valuation allowances against all of our deferred tax assets in the United States. The U.S. valuation allowances were required based on historical losses and uncertainty as to the timing of when we would be able to generate the necessary level of earnings to recover these deferred tax assets. During 2010 and 2011, our United States operations delivered sustained profits. Based on financial forecasts and the continued anticipated growth for the U.S. market, we released $78 million of the U.S. valuation allowances in the fourth quarter of 2011. As at December 31, 2012, we have remaining U.S. valuation allowances of $94 million, relating to deferred tax assets with restrictions on their usability.

The effective income tax rate on income from operations before income taxes was 18.5% for 2012 compared to 16.6% for 2011. In 2012 and 2011, income tax rates were impacted by the items discussed in the "Other Income" section and the valuation allowances described above. Excluding Other Income and Expense, after tax, and the valuation allowances, the effective income tax rate increased to 23.7% for 2012 compared to 20.5% for 2011 primarily as result of a reduction in the utilization of unbenefited losses in the United States partially offset by a decrease in losses not benefited in Europe and permanent items.

Net Income

Net income of $1.43 billion for 2012 increased $411 million compared to 2011. Excluding Other Income and Expense, after tax, discussed in the "Other Income" section, net income increased $161 million. The increase in net income is the result of the increase in income from operations before income taxes partially offset by higher income taxes, both as discussed above.

Net Loss Attributable to Non-controlling Interests

The net loss attributable to non-controlling interests of $7 million for 2012 increased $4 million compared to 2011.

Net Income attributable to Magna International Inc.

Net income attributable to Magna International Inc. of $1.43 billion for 2012 increased $415 million compared to 2011. Excluding Other Income and Expense, after tax, discussed in the "Other Income" section, net income attributable to Magna International Inc. increased $165 million as a result of the increases in net income and net loss attributable to non-controlling interests, both as discussed above.

Earnings per Share

          For the year           
          ended December 31,          
          2012       2011         Change
Earnings per Common Share                            
  Basic       $ 6.17 $      4.26       + 45%
  Diluted        $ 6.09 $     4.20       + 45%
Average number of Common Shares outstanding (millions)
  Basic          232.4       239.3       - 3%
  Diluted          235.2       242.8       - 3%

Diluted earnings per share increased $1.89 to $6.09 for 2012 compared to $4.20 for 2011. Other Income, after tax, positively impacted diluted earnings per share in 2012 by $0.35 and Other Expense negatively impacted diluted earnings per share in 2011 by $0.65, both as discussed in the "Other Income" section, while the valuation allowances as discussed in the "Income Taxes" section positively impacted diluted earnings per share in 2012 and 2011 by $0.38 and $0.32, respectively. Excluding Other Income and Expense, after tax, and the valuation allowances as discussed in the "Income Taxes" section, the $0.83 increase in diluted earnings per share is a result of the increase in net income attributable to Magna International Inc. and a decrease in the weighted average number of diluted shares outstanding during 2012.

The decrease in the weighted average number of diluted shares outstanding was primarily due to the repurchase and cancellation of Common Shares, during or subsequent to 2011, pursuant to our normal course issuer bids and the cashless exercise of options.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flow from Operations

          For the year           
          ended December 31,           
          2012       2011         Change
Net income       $  1,426     $ 1,015          
Items not involving current cash flows           708       826          
          2,134       1,841       293
Changes in non-cash operating assets and liabilities           72       (631)          
Cash provided from operating activities        2,206     $  1,210       996

Cash flow from operations before changes in non-cash operating assets and liabilities increased $293 million to $2.13 billion for 2012 compared to $1.84 billion for 2011. The increase in cash flow from operations was due to a $411 million increase in net income, as discussed above, partially offset by a $118 million decrease in items not involving current cash flows. Items not involving current cash flows are comprised of the following:

          For the year 
          ended December 31, 
          2012     2011
Depreciation and amortization          801   $  686
Other non-cash charges             154     110
Amortization of other assets included in cost of goods sold           113     80
Deferred income taxes             (46)     (76)
Equity income             (151)     (121)
Non-cash portion of Other expense (income), net             (163)     147
Items not involving current cash flows           708   826

Cash provided from non-cash operating assets and liabilities amounted to $72 million for 2012 compared to cash invested of $631 million for 2011. The change in non-cash operating assets and liabilities is comprised of the following sources (and uses) of cash:

          For the year 
          ended December 31, 
          2012     2011
Accounts receivable           (46)   $  (909)
Inventories             (315)     (282)
Prepaid expenses and other             36     (49)
Accounts payable             249     475
Accrued salaries and wages             37     80
Other accrued liabilities            97     87
Income taxes payable             16     (29)
Deferred revenue             (2)     (4) 
Changes in non-cash operating assets and liabilities           72   $  (631)

The increase in inventories in 2012 was primarily due to higher tooling inventory and increased production inventory to support launch activities. The increase in accounts payable in 2012 was primarily due to increased production activities at the end of 2012 and the timing of payments.

Capital and Investment Spending

          For the year           
          ended December 31,           
          2012       2011         Change
Fixed asset additions        (1,274)     $  (1,236)          
Investments and other assets           (122)       (196)          
Fixed assets, investments and other assets additions          (1,396)       (1,432)          
Purchase of subsidiaries           (525)       (120)          
Disposal of facility                 112          
Proceeds from disposition           106       168          
Cash used for investment activities         (1,815)     $  (1,272)       $  (543)

Fixed assets, investments and other assets additions

In 2012, we invested $1.27 billion in fixed assets. While investments were made to refurbish or replace assets consumed in the normal course of business and for productivity improvements, a large portion of the investment in 2012 was for facilities and manufacturing equipment for programs that will be launching subsequent to 2012. Consistent with our strategy to expand in developing markets, approximately 24% (2011 - 23%) of this investment was in China, India, Brazil and Russia.

In 2012, we invested $113 million in other assets related primarily to fully reimbursable engineering costs and tooling for programs that launched during 2012 or will be launching subsequent to 2012, as well as $9 million in equity accounted investments.

Purchase of subsidiaries

During 2012, we invested $525 million to purchase subsidiaries, including the acquisition of:

  • ixetic, a manufacturer of automotive vacuum, engine and transmission pumps, which has operations in Germany, Bulgaria and China as well as representation in Brazil, India, Japan and the United States. The acquired business has sales primarily to BMW, Daimler, Volkswagen, Schaeffler, ZF, Ford, Chrysler, Renault-Nissan and Toyota;
  • the controlling 27% interest in the E-Car partnership;
  • the remaining 50% interest in STT; and
  • BDW, a structural casting supplier of aluminium components, which has operations in Germany, Poland and Hungary. The acquired business has sales primarily to Volkswagen, Audi, Porsche, Mercedes-Benz, Ferrari and ZF.

During 2011, we invested $120 million to purchase subsidiaries, including the acquisition of TKASB, which consists of four manufacturing facilities in Brazil that assemble chassis structural components and modules. The acquired business has sales to Ford, Fiat, Renault Nissan, Honda and PSA.

Proceeds from disposition

The $106 million of proceeds include:

  • normal course fixed and other asset disposals;
  • $18 million cash proceeds received with respect to the sale of non-core real estate; and
  • $9 million cash proceeds received with respect to the disposal of ABCP.

Financing

          For the year         
          ended December 31,         
          2012       2011        Change
Increase in bank indebtedness        $  42     $  38        
Repayments of debt           (309)       (47)        
Issues of debt           348       146        
Settlement of stock options           (19)       (30)        
Issue of Common Shares           14       59        
Contribution to subsidiaries by non-controlling interest                20        
Repurchase of Common Shares           (40)       (407)        
Dividends paid           (252)       (236)        
Cash used for financing activities        $  (216)      $  (457)     $  241

Repayments of debt for 2012 relate primarily to BDW and Pabsa S.A. debt payments subsequent to acquisition and repayments of our term lines of credit in our Rest of World segment, while issues of debt relates primarily to higher debt levels in our Rest of World segment.

During 2012, our Honorary Chairman and Founder, Mr. Stronach, exercised 900,001 options on a cashless basis in accordance with the applicable stock option plans. On exercise, cash payments totalling $15 million were made to Mr. Stronach which represented the difference between the aggregate fair market value of the Option Shares based on the closing price of our Common Shares on the Toronto Stock Exchange ("TSX") on the date of exercise and the aggregate Exercise Price of all such options surrendered.

During 2012, we repurchased 0.8 million Common Shares for an aggregate purchase price of $40 million under our normal course issuer bid.

Cash dividends paid per Common Share were $1.10 for 2012, for a total of $252 million.

Financing Resources

          As at      As at        
          December 31,     December 31,        
          2012      2011         Change
Liabilities                        
  Bank indebtedness        $  71     $ 36        
  Long-term debt due within one year           249     151        
  Long-term debt           112     46        
          432     233        
Non-controlling interest           29     27        
Shareholders' equity           9,429     8,175        
Total capitalization        $  9,890     $ 8,435     $  1,455

Total capitalization increased by $1.45 billion to $9.89 billion at December 31, 2012 compared to $8.44 billion at December 31, 2011, primarily as a result of a $1.25 billion increase in shareholders' equity and a $199 million increase in liabilities.

The increase in shareholders' equity was primarily as a result of net income earned in 2012 partially offset by dividends paid.

The increase in liabilities relates primarily to an increase in debt in our Rest of World segment and debt assumed in connection with the BDW acquisition.

Cash Resources

During 2012, our cash resources increased by $197 million to $1.52 billion as a result of the cash provided from operating activities and the favourable effect of foreign exchange partially offset by cash used for investing and financing activities, as discussed above. In addition to our cash resources at December 31, 2012, we had term and operating lines of credit totalling $2.48 billion of which $2.05 billion was unused and available.

Maximum Number of Shares Issuable

The following table presents the maximum number of shares that would be outstanding if all of the outstanding options at February 28, 2013 were exercised:

Common Shares                                                   233,363,125
Stock options (i)  6,355,900
  239,719,025
(i)  Options to purchase Common Shares are exercisable by the holder in accordance with the vesting provisions and upon payment of the exercise price as may be determined from time to time pursuant to our stock option plans.

 

Contractual Obligations and Off-Balance Sheet Financing

A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Consistent with our customer obligations, substantially all of our purchases are made under purchase orders with our suppliers which are requirements based and accordingly do not specify minimum quantities. Other long-term liabilities are defined as long-term liabilities that are recorded on our consolidated balance sheet. Based on this definition, the following table includes only those contracts which include fixed or minimum obligations.

At December 31, 2012, we had contractual obligations requiring annual payments as follows:

                  2014-       2016-                
          2013       2015       2017       Thereafter       Total
Operating leases        318     $  543     $  437     $  336     $  1,634
Long-term debt           249       55       32       24       360
Unconditional Purchase Obligations:                                          
  Materials and Services           1,498       118       8       7       1,631
  Capital           192       37       9       1        239
Total contractual obligations        $  2,257     753     $  486     $  368     $  3,864

Our unfunded obligations with respect to employee future benefit plans, which have been actuarially determined, were $569 million at December 31, 2012. These obligations are as follows:

                          Termination and        
          Pension       Retirement       Long Service        
          Liability       Liability       Arrangements       Total
Projected benefit obligation         $  521     $  41     $  296     $  858
Less plan assets             (289)        —             (289)
Unfunded amount          $  232     $  41     $  296     $  569

Our off-balance sheet financing arrangements are limited to operating lease contracts.

The majority of our facilities are subject to operating leases. Operating lease payments in 2012 for facilities were $277 million. Operating lease commitments in 2013 for facilities are expected to be $274 million. A majority of our existing lease agreements generally provide for periodic rent escalations based either on fixed-rate step increases, or on the basis of a consumer price index adjustment (subject to certain caps).

We also have operating lease commitments for equipment. These leases are generally of shorter duration. Operating lease payments for equipment were $48 million for 2012, and are expected to be $44 million in 2013.

Although our consolidated contractual annual lease commitments decline year by year, we expect that existing leases will either be renewed or replaced, or alternatively, we will incur capital expenditures to acquire equivalent capacity.

Foreign Currency Activities

Our North American operations negotiate sales contracts with OEMs for payment in both U.S. and Canadian dollars. Materials and equipment are purchased in various currencies depending upon competitive factors, including relative currency values. Our North American operations use labour and materials which are paid for in both U.S. and Canadian dollars. Our Mexican operations generally use the U.S. dollar as the functional currency.

Our European operations negotiate sales contracts with OEMs for payment principally in euros and British pounds. The European operations' material, equipment and labour are paid for principally in euros and British pounds.

We employ hedging programs, primarily through the use of foreign exchange forward contracts, in an effort to manage our foreign exchange exposure, which arises when manufacturing facilities have committed to the delivery of products for which the selling price has been quoted in foreign currencies. These commitments represent our contractual obligations to deliver products over the duration of the product programs, which can last a number of years. The amount and timing of the forward contracts will be dependent upon a number of factors, including anticipated production delivery schedules and anticipated production costs, which may be paid in the foreign currency. In addition, we enter into foreign exchange contracts to manage foreign exchange exposure with respect to internal funding arrangements. Despite these measures, significant long-term fluctuations in relative currency values, in particular a significant change in the relative values of the U.S. dollar, Canadian dollar, euro or British pound, could have an adverse effect on our profitability and financial condition (as discussed throughout this MD&A).

RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED DECEMBER 31, 2012

Sales
                           
          For the three months          
          ended December 31,           
          2012       2011         Change
Vehicle Production Volumes (millions of units)                            
  North America          3.846       3.438       +  12%
  Western Europe          3.120       3.391       -  8%
Sales                            
  External Production                            
    North America        $  3,878     $  3,462       +  12%
    Europe           2,209       2,167       +  2%
    Rest of World           521       386       +  35%
  Complete Vehicle Assembly           697       625       +  12%
  Tooling, Engineering and Other           728        611       +  19%
Total Sales        $  8,033     $  7,251       + 11%

External Production Sales - North America

External production sales in North America increased 12% or $416 million to $3.88 billion for the fourth quarter of 2012 compared to $3.46 billion for the fourth quarter of 2011. The increase in external production sales is primarily as a result of:

  • higher production volumes on certain existing programs;
  • the launch of new programs during or subsequent to the fourth quarter of 2011, including the:
    • Ford Fusion and Lincoln MKZ;
    • Cadillac ATS; and
    • Dodge Dart;
  • an increase in reported U.S. dollar sales due to the strengthening of the Canadian dollar against the U.S. dollar;
  • growth in sales for non-traditional markets; and
  • acquisitions completed during or subsequent to the fourth quarter of 2011, which positively impacted sales by $24 million.

These factors were partially offset by:

  • programs that ended production during or subsequent to the fourth quarter of 2011, including the:
    • Jeep Liberty; and
    • Mazda 6;
  • a decrease in content on certain programs, including the Ford Escape; and
  • net customer price concessions subsequent to the fourth quarter of 2011.

External Production Sales - Europe

External production sales in Europe increased 2% or $42 million to $2.21 billion for the fourth quarter of 2012 compared to $2.17 billion for the fourth quarter of 2011. The increase in external production sales is primarily as a result of:

  • the launch of new programs during or subsequent to the fourth quarter of 2011, including the:
    • Ford Transit Custom;
    • Kia Rio;
    • Mercedes-Benz B-Class;
    • Volkswagen up!, SEAT Mii and Skoda Citigo; and
    • Ford Kuga; and
  • acquisitions completed during or subsequent to the fourth quarter of 2011, which positively impacted sales by $120 million, including BDW, the re-acquisition of an interiors systems operation and ixetic.

These factors were partially offset by:

  • lower production volumes on certain existing programs;
  • a decrease in reported U.S. dollar sales primarily as a result of the weakening of the euro against the U.S. dollar; and
  • net customer price concessions subsequent to the fourth quarter of 2011.

External Production Sales - Rest of World

External production sales in Rest of World increased 35% or $135 million to $521 million for the fourth quarter of 2012 compared to $386 million for the fourth quarter of 2011, primarily as a result of:

  • the launch of new programs during or subsequent to the fourth quarter of 2011, primarily in China and Brazil;
  • acquisitions completed during or subsequent to the fourth quarter of 2011, which positively impacted sales by $47 million, including TKASB; and
  • an increase in content on certain programs.

These factors were partially offset by a $20 million decrease in reported U.S. dollar sales as a result of the net weakening of foreign currencies against the U.S. dollar, including the Brazilian real.

Complete Vehicle Assembly Sales

          For the three months          
          ended December 31,           
          2012       2011         Change
Complete Vehicle Assembly Sales        $  697     $  625       +  12%
Complete Vehicle Assembly Volumes (Units)                            
MINI Countryman, Peugeot RCZ, Mercedes-Benz G-Class                            
MINI Paceman and Aston Martin Rapide          31,450       29,878       +  5% 

Complete vehicle assembly sales increased 12% or $72 million to $697 million for the fourth quarter of 2012 compared to $625 million for the fourth quarter of 2011 while assembly volumes increased 5% or 1,572 units.

The increase in complete vehicle assembly sales is primarily as a result of:

  • an increase in assembly volumes and favourable content for the Mercedes-Benz G-Class;
  • an increase in assembly volumes for the  MINI Countryman; and
  • the launch of the MINI Paceman during the fourth quarter of 2012.

These factors were partially offset by:

  • the end of production of the Aston Martin Rapide at our Magna Steyr facility during the second quarter of 2012;
  • a $28 million decrease in reported U.S. dollar sales as a result of the weakening of the euro against the U.S. dollar; and
  • a decrease in assembly volumes for the Peugeot RCZ.

Tooling, Engineering and Other Sales

Tooling, engineering and other sales increased 19% or $117 million to $728 million for the fourth quarter of 2012 compared to $611 million for the fourth quarter of 2011.

In the fourth quarter of 2012, the major programs for which we recorded tooling, engineering and other sales were the:

  • Fiat Viaggio;
  • MINI Countryman;
  • Mercedes-Benz M-Class;
  • BMW 6-Series;
  • Opel Cascada Convertible;
  • Ford Transit;
  • Volkswagen up!; and
  • Ford Escape.

In the fourth quarter of 2011, the major programs for which we recorded tooling, engineering and other sales were the:

  • Ford Fusion;
  • MINI Countryman;
  • Chery A6 Coupe;
  • Peugeot RCZ;
  • Audi A1;
  • Mercedes-Benz SLS;
  • BMW 6-Series; and
  • Opel Calibra.

In addition, tooling, engineering and other sales were negatively impacted by the weakening of the euro against the U.S. dollar.

Segment Analysis

    For the three months ended December 31, 
    External Sales          Adjusted EBIT 
    2012     2011      Change          2012     2011   Change
North America  $  4,098   $  3,650    $  448        $  373    $  335 $  38
Europe     3,333      3,165      168         24      (3)   27
Rest of World     596     425     171         (8)      14   (22)
Corporate and Other     6     11     (5)          (2)      (25)   23 
Total reportable                                    
  segments  $  8,033   $  7,251   $  782       $  387   $  321 $  66

Excluded from Adjusted EBIT for the fourth quarters of 2012 and 2011 were the following Other Income and Expense items, which have been discussed in the "Other Income" section.

          For the three months 
          ended December 31, 
          2012       2011
North America                  
  Re-measurement gain of STT       $  (35)      $  —
  Impairment charges           2       7
  Insurance proceeds                (15)
          (33)       (8)
Europe                  
  Impairment charges           23       14
  Restructuring charges           55      
  Loss on disposal of facility                16
  Customer bankruptcy                  11
          78       41
        $  45     $  33

North America

Adjusted EBIT in North America increased $38 million to $373 million for the fourth quarter of 2012 compared to $335 million for the fourth quarter of 2011 primarily as a result of:

  • margins earned on higher production sales, including margins earned on the launch of new facilities and new programs;
  • lower costs incurred in preparation for upcoming launches; and
  • productivity and efficiency improvements at certain facilities.

These factors were partially offset by:

  • intangible asset amortization of $39 million related to the acquisition and re-measurement of E-Car;
  • programs that ended production during or subsequent to the fourth quarter of 2011;
  • higher warranty costs of $6 million;
  • increased pre-operating costs incurred at new facilities;
  • higher restructuring and downsizing costs;
  • higher affiliation fees paid to corporate;
  • a larger amount of employee profit sharing;
  • operational inefficiencies and other costs at certain facilities; and
  • net customer price concessions subsequent to the fourth quarter of 2011.

Europe

Adjusted EBIT in Europe increased $27 million to $24 million for the fourth quarter of 2012 compared to a loss of $3 million for the fourth quarter of 2011 primarily as a result of:

  • productivity and efficiency improvements at certain facilities;
  • a smaller amount of employee profit sharing;
  • lower restructuring and downsizing costs; and
  • higher equity income.

These factors were partially offset by:

  • higher warranty costs of $6 million;
  • increased pre-operating costs incurred at new facilities;
  • the net effect of the disposition during the third quarter of 2011 and subsequent acquisition in the third quarter of 2012 of an interior systems operation;
  • rising commodity costs;
  • higher affiliation fees paid to corporate;
  • higher costs incurred in preparation for upcoming launches;
  • operational inefficiencies and other costs at certain facilities; and
  • programs that ended production during or subsequent to the fourth quarter of 2011.

Rest of World

Rest of World Adjusted EBIT decreased $22 million to a loss of $8 million for the fourth quarter of 2012 compared to income of $14 million for the fourth quarter of 2011 primarily as a result of:

  • higher costs related to new facilities;
  • operational inefficiencies and other costs at certain facilities, in particular at certain facilities in South America;
  • higher affiliation fees paid to Corporate; and
  • net customer price concessions subsequent to the fourth quarter of 2011.

These factors were partially offset by:

  • lower warranty costs of $3 million; and
  • higher equity income.

Corporate and Other

Corporate and Other Adjusted EBIT increased $23 million to a loss of $2 million for the fourth quarter of 2012 compared to a loss of $25 million for the fourth quarter of 2011. The loss related to our equity accounted investment in E-Car included in Corporate and Other was $13 million for the fourth quarter of 2011. Excluding E-Car, Corporate and Other Adjusted EBIT increased $10 million to a loss of $2 million for the fourth quarter of 2012 compared to a loss of $12 million for the fourth quarter of 2011 primarily as a result of:

  • an increase in affiliation fees earned from our divisions; and
  • a $2 million revaluation gain in respect of ABCP.

These factors were partially offset by:

  • higher stock-based compensation; and
  • higher incentive compensation.

FUTURE CHANGES IN ACCOUNTING POLICIES


Intangibles

In July 2012, the FASB issued ASU 2012-02, "Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment". ASU 2012-02 provides an option to first perform a qualitative assessment to determine whether it is more-likely-than-not that an indefinite-lived intangible asset is impaired. This new standard will be effective for us in the first quarter of 2013. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.

COMMITMENTS AND CONTINGENCIES


From time to time, we may be contingently liable for litigation, legal and/or regulatory actions and proceedings and other claims.

Refer to note 17 of our unaudited interim consolidated financial statements for the three months and year ended December 31, 2012, which describes these claims.

For a discussion of risk factors relating to legal and other claims/actions against us, refer to "Item 3. Description of the Business - Risk Factors" in our Annual Information Form and Annual Report on Form 40-F, each in respect of the year ended December 31, 2011.

CONTROLS AND PROCEDURES


Changes in Internal Controls over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

FORWARD-LOOKING STATEMENTS


The previous discussion contains statements that constitute "forward-looking information" or "forward-looking statements" within the meaning of applicable securities legislation, including, but not limited to, statements relating to expected light vehicle production and operating performance in North America and Europe; implementation of improvement plans in our underperforming operations, and/or restructuring actions, particularly in Europe; improved future results in ROW and Europe; the impact to Adjusted EBIT of new facilities launches and acquisitions in Rest of World, particularly Asia and South America; the future growth of the automotive pump market and the potential benefits expected to be achieved from our acquisitions of ixetic Verwaltungs GmbH and the remaining 50% interest in STT Technologies Inc.; the integration of and potential benefits expected to be achieved from our completed acquisition of the outstanding 27% interest in Magna E-Car Systems; and future purchases of our Common Shares under the Normal Course Issuer Bid. The forward-looking information in this MD&A is presented for the purpose of providing information about management's current expectations and plans and such information may not be appropriate for other purposes. Forward-looking statements may include financial and other projections, as well as statements regarding our future plans, objectives or economic performance, or the assumptions underlying any of the foregoing, and other statements that are not recitations of historical fact. We use words such as "may", "would", "could", "should", "will", "likely", "expect", "anticipate", "believe", "intend", "plan", "forecast", "outlook", "project", "estimate" and similar expressions suggesting future outcomes or events to identify forward-looking statements. Any such forward-looking statements are based on information currently available to us, and are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. However, whether actual results and developments will conform with our expectations and predictions is subject to a number of risks, assumptions and uncertainties, many of which are beyond our control, and the effects of which can be difficult to predict, including, without limitation: the potential for a deterioration of economic conditions or an extended period of economic uncertainty; declines in consumer confidence and the impact on production volume levels; risks arising from the recession in Europe, including the potential for a deterioration of sales of our three largest German-based OEM customers; inability to sustain or grow our business with OEMs; restructuring actions by OEMs, including plant closures; restructuring, downsizing and/or other significant non-recurring costs; continued underperformance of one or more of our operating divisions; our ability to successfully launch material new or takeover business; liquidity risks; bankruptcy or insolvency of a major customer or supplier; a prolonged disruption in the supply of components to us from our suppliers; scheduled shutdowns of our customers' production facilities (typically in the third and fourth quarters of each calendar year); shutdown of our or our customers' or sub-suppliers' production facilities due to a labour disruption; our ability to successfully compete with other automotive suppliers; a reduction in outsourcing by our customers or the loss of a material production or assembly program; the termination or non-renewal by our customers of any material production purchase order; a shift away from technologies in which we are investing; risks arising due to the failure of a major financial institution; impairment charges related to goodwill, long-lived assets and deferred tax assets; shifts in market share away from our top customers; shifts in market shares among vehicles or vehicle segments, or shifts away from vehicles on which we have significant content; risks of conducting business in foreign markets, including China, India, South America and other non-traditional markets for us; exposure to, and ability to offset, volatile commodities prices; fluctuations in relative currency values; our ability to successfully identify, complete and integrate acquisitions or achieve anticipated synergies; our ability to conduct appropriate due diligence on acquisition targets; ongoing pricing pressures, including our ability to offset price concessions demanded by our customers; warranty and recall costs; risks related to natural disasters and potential production disruptions; factors that could cause an increase in our pension funding obligations; legal claims and/or regulatory actions against us; our ability to understand and compete successfully in non-automotive businesses in which we pursue opportunities; changes in our mix of earnings between jurisdictions with lower tax rates and those with higher tax rates, as well as our ability to fully benefit tax losses; other potential tax exposures; inability to achieve future investment returns that equal or exceed past returns; the unpredictability of, and fluctuation in, the trading price of our Common Shares; work stoppages and labour relations disputes; changes in credit ratings assigned to us; changes in laws and governmental regulations; costs associated with compliance with environmental laws and regulations; and other factors set out in our Annual Information Form filed with securities commissions in Canada and our annual report on Form 40-F filed with the United States Securities and Exchange Commission, and subsequent filings. In evaluating forward-looking statements, we caution readers not to place undue reliance on any forward-looking statements and readers should specifically consider the various factors which could cause actual events or results to differ materially from those indicated by such forward-looking statements. Unless otherwise required by applicable securities laws, we do not intend, nor do we undertake any obligation, to update or revise any forward-looking statements to reflect subsequent information, events, results or circumstances or otherwise.

MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
[Unaudited]
[U.S. dollars in millions, except per share figures]
      Three months ended      Year ended 
      December 31,      December 31, 
  Note    2012        2011      2012        2011
Sales     8,033      $  7,251    $  30,837      $  28,748
Costs and expenses                            
  Cost of goods sold       7,038       6,419     27,010        25,434
  Depreciation and amortization       243       179     801       686
  Selling, general and administrative  13    409       360     1,519       1,382
  Interest expense (income), net      1       (3)     16       (6)
  Equity income       (44)       (28)      (151)        (121)
  Other expense (income), net  2    45       33      (108)       156
Income from operations before income taxes      341       291     1,750       1,217
Income taxes  12    (9)       (20)     324       202
Net income       350       311     1,426       1,015
Net loss attributable to non-controlling interests      1       1      7       3
Net income attributable to Magna International Inc.     $  351     $  312    $  1,433      $  1,018
Earnings per Common Share:  3                          
  Basic     $ 1.51      $  1.33   $  6.17      $  4.26
  Diluted     $  1.49     $  1.32     $  6.09      $  4.20
Cash dividends paid per Common Share     $  0.275     $  0.250    $  1.100     $  1.000
Average number of Common Shares outstanding during
the period [in millions]:
3                          
  Basic       232.0       234.5     232.4       239.3
  Diluted        234.8       236.9     235.2       242.8
See accompanying notes

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
[Unaudited]
[U.S. dollars in millions]
      Three months ended     Year ended 
      December 31,      December 31, 
  Note    2012      2011      2012     2011
Net income     $  350   $  311   $  1,426   $  1,015
Other comprehensive income (loss), net of tax:  15                      
  Net unrealized gain (loss) on translation of net investment
in foreign operations 
    56     (61)      88     (171)
  Net unrealized (loss) gain on available-for-sale investments       (2)      3      (4)     (6)
  Net unrealized (loss) gain on cash flow hedges       (1)      (2)     75      (41)
  Reclassification of net (gain) loss on cash flow hedges
to net income 
     (11)     6      (18)     (22)
  Reclassification of net gain on pensions to net income       (42)            (42)      
  Pension and post retirement benefits       (19)     (50)     (19)     (49)
Other comprehensive (loss) income      (19)      (104)     80     (289)
Comprehensive income      331     207     1,506     726
Comprehensive (income) loss attributable to non-controlling
interests 
     (1)     -     5     3
Comprehensive income attributable to
Magna International Inc.  
  $  330    $  207    $  1,511   $  729
See accompanying notes

MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Unaudited]
[U.S. dollars in millions]
      Three months ended        Year ended 
      December 31,        December 31, 
  Note    2012      2011      2012      2011
Cash provided from (used for):                        
                         
OPERATING ACTIVITIES                        
Net income    $  350   $  311   $  1,426   $  1,015
Items not involving current cash flows  4   164     156     708     826
      514     467     2,134     1,841
Changes in non-cash operating assets and liabilities  4    559     295     72      (631)
Cash provided from operating activities       1,073     762     2,206      1,210
                         
INVESTMENT ACTIVITIES                        
Fixed asset additions      (478)      (528)     (1,274)     (1,236)
Purchase of subsidiaries    (446)     (101)      (525)     (120)
Increase in investments and other assets       (25)     (56)     (122)     (196)
Disposals of facilities            —          112
Proceeds from disposition  2    13     58     106     168
Cash used for investing activities       (936)     (627)      (1,815)     (1,272)
                         
FINANCING ACTIVITIES                        
Increase in bank indebtedness       22      18     42     38
Repayments of debt       (28)     (5)      (309)      (47)
Settlement of stock options                (19)     (30)
Issues of debt      19     30     348      146
Issue of Common Shares       9     1     14      59
Repurchase of Common Shares       (19)     (122)     (40)      (407)
Contribution to subsidiaries by non-controlling interests            11           20
Dividends paid       (63)     (59)      (252)      (236)
Cash used for financing activities       (60)     (126)      (216)     (457)
                         
Effect of exchange rate changes on cash and cash equivalents       (2)      (11)     22      (37)
Net increase (decrease) in cash and cash equivalents
during the period  
    75      (2)     197      (556)
Cash and cash equivalents, beginning of period       1,447     1,327     1,325      1,881
Cash and cash equivalents, end of period     $  1,522   $  1,325   $  1,522   $  1,325
See accompanying notes

MAGNA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
[Unaudited]
[U.S. dollars in millions]
                       
As at December 31,  Note          2012         2011
ASSETS                      
Current assets                      
Cash and cash equivalents  4       $  1,522       $  1,325
Accounts receivable             4,774         4,398
Inventories  6          2,512         2,045
Deferred tax assets  12          170         206
Prepaid expenses and other             157         172
            9,135         8,146
                       
Investments  16          385         438
Fixed assets, net             5,273         4,236
Goodwill  7          1,473         1,196
Deferred tax assets             90         69
Other assets  8          753         594
          $  17,109       $  14,679
                       
LIABILITIES AND SHAREHOLDERS' EQUITY                      
Current liabilities                      
Bank indebtedness            $  71       $  36
Accounts payable            4,450         3,961
Accrued salaries and wages             617         525
Other accrued liabilities  9         1,185         1,002
Income taxes payable            93         5
Deferred tax liabilities             19         44
Long-term debt due within one year              249         151
            6,684         5,724
                       
Long-term employee benefit liabilities  10          560         419
Long-term debt             112         46
Other long-term liabilities  11         154         207
Deferred tax liabilities             141         81
            7,651         6,477
                       
Shareholders' equity                      
Capital stock                      
  Common Shares                      
    [issued: 233,115,783; 2011 - 233,317,792]             4,391         4,373
Contributed surplus             80         63
Retained earnings            4,462         3,317
Accumulated other comprehensive income  15         496         422
            9,429         8,175
                       
Non-controlling interests             29         27
            9,458         8,202
          $  17,109       $  14,679
See accompanying notes

MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
[Unaudited]
[U.S. dollars in millions]
    Common Shares                               
          Stated      Contributed      Retained           Non- 
controlling
     Total
  Note Number      Value     Surplus      Earnings      AOCI (i)      Interest      Equity
    [in millions]                                    
Balance, December 31, 2010      242.6   $ 4,500   $  56   $  2,715   $  752   $  3   $  8,026
                                         
Net income                          1,018           (3)     1,015
Other comprehensive loss                                 (289)            (289)
Contributions to subsidiaries by
non-controlling interests       
                                20     20
Acquisition of subsidiaries                                        7      7
Shares issued on exercise of stock
options  
  1.4     69     (10)                       59
Release of restricted stock            6     (6)                      
Repurchase and cancellation under
normal course issuer bid  
  (10.7)     (204)           (162)     (41)           (407)
Stock-based compensation expense  13               31                       31
Settlement of stock options  13               (8)     (16)                  (24)
Dividends paid            2           (238)                   (236)
Balance, December 31, 2011      233.3     4,373     63      3,317     422     27     8,202
                                         
Net income                          1,433           (7)     1,426
Other comprehensive loss                                 78     2     80
Acquisitions of subsidiaries                                        7     7
Shares issued on exercise of stock
options 
  0.4     19     (5)                       14
Repurchase and cancellation under
normal course issuer bid  
  (0.8)     (18)            (20)     (4)            (42)
Release of restricted stock            5     (5)                        —
Release of restricted stock units            5     (5)                         —
Stock-based compensation expense  13               39                       39
Settlement of stock options  13              (7)      (9)                 (16)
Dividends paid     0.2     7           (259)                   (252)
Balance, December 31, 2012      233.1   $  4,391   $  80   $  4,462   $  496   $  29   $  9,458
(i)     AOCI is Accumulated Other Comprehensive Income.
See accompanying notes

MAGNA INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
[All amounts in U.S. dollars and all tabular amounts in millions unless otherwise noted]


1. SIGNIFICANT ACCOUNTING POLICIES

[a] Basis of Presentation

The unaudited interim consolidated financial statements of Magna International Inc. and its subsidiaries [collectively "Magna" or the "Company"] have been prepared in United States dollars following United States generally accepted accounting principles ["GAAP"] as further discussed in note 1[b] and the accounting policies as set out in note 1 to the annual consolidated financial statements for the year ended December 31, 2011.

The unaudited interim consolidated financial statements do not conform in all respects to the requirements of GAAP for annual financial statements. Accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the December 31, 2011 audited consolidated financial statements and notes included in the Company's 2011 Annual Report.

In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, which consist only of normal and recurring adjustments, necessary to present fairly the financial position at December 31, 2012 and the results of operations, changes in equity and cash flows for the three-month periods and years ended December 31, 2012 and 2011.

[b] Accounting Changes

Comprehensive Income

During 2011, the Financial Accounting Standards Board ["FASB"] issued Accounting Standards Update ["ASU"] 2011-05 and ASU 2011-12, "Comprehensive Income (Topic 220)", requiring entities to present net income and other comprehensive income in either a single continuous statement or in two consecutive statements of net income and other comprehensive income. The adoption of this ASU did not have a material impact on the unaudited interim consolidated financial statements.

Fair Value Measurement

During 2011, the FASB issued ASU 2011-04, "Fair Value Measurement (Topic 820)", clarifying the existing measurement and disclosure requirements and expanding the disclosure requirements for certain fair value measurements. The adoption of this ASU did not have a material impact on the unaudited interim consolidated financial statements.

Goodwill

In September 2011, the FASB issued ASU 2011-08, "Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment". ASU 2011-08 provides an option to perform a qualitative assessment to determine whether further goodwill impairment testing is necessary. If, as a result of the qualitative assessment, it is determined that it is more-likely-than-not that a reporting unit's fair value is less than its carrying amount, the two-step quantitative impairment test is required. Otherwise, no further testing is required. ASU 2011-08 is effective for the Company for the year ending December 31, 2012. The adoption of this ASU did not have a material impact on the unaudited interim consolidated financial statements.

[c] Future Accounting Standards

Intangibles

In July 2012, the FASB issued ASU 2012-02, "Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment". ASU 2012-02 provides an option to first perform a qualitative assessment to determine whether it is more-likely-than-not that an indefinite-lived intangible asset is impaired. This new standard will be effective for the Company in the first quarter of 2013. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

[d] Seasonality

The Company's businesses are generally not seasonal. However, the Company's sales and profits are closely related to its automotive customers' vehicle production schedules. The Company's largest North American customers typically halt production for approximately two weeks in July and one week in December. Additionally, many of the Company's customers in Europe typically shutdown vehicle production during portions of August and one week in December.

2. OTHER EXPENSE (INCOME), NET

              Year ended
              December 31, 
              2012      2011
Fourth Quarter                    
  Re-measurement gain of STT    [a]        $  (35)   $  
  Impairment of long-lived assets    [b, d]           25     21
  Restructuring    [c]           55      
  Loss on disposal of facility    [e]               16
  Insurance proceeds    [f]                (15)
  Customer bankruptcy    [g]                11
              45     33
Third Quarter                    
  Re-measurement gain of E-Car   [a]