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Magna: ManagementS Discussion And Analysis Of Results Of Operations And Financial Position

The following excerpt is from the company's SEC filing.

Unless otherwise noted, all amounts in this Managements 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 nine months ended September 30, 2015 included in this Quarterly Report, and the audited consolidated financial statements and MD&A for the year ended December 31, 2014 included in our 2014 Annual Report to Shareholders.

This MD&A has been prepared as at November 4, 2015.

OVERVIEW

We are a leading global automotive supplier with 285 manufacturing operations and 83 product development, engineering and sales centres in 29 countries. We have over 125,000 employees focused on delivering superior value to our customers through innovative products, processes and World Class Manufacturing. Our product capabilities include producing body, chassis, exterior, seating, powertrain, electronic, vision, closure 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.

HIGHLIGHTS

Basis of Presentation

In the third quarter of 2015, we sold substantially all of our interiors operations (excluding our seating operations). The assets and liabilities, and operating results for the previously reported interiors operations are presented as discontinued operations and have therefore been excluded from both continuing operations and segment results for all periods presented in the attached financial statements. This Managements Discussion and Analysis reflects the results of continuing operations, unless otherwise noted.

North American light vehicle production increased 4% to 4.3 million units and European light vehicle production increased 4% to 4.7 million units, each in the third quarter of 2015 compared to the third quarter of 2014.

We posted sales of $7.66 billion for the third quarter of 2015, a decrease of $586 million or 7% from the third quarter of 2014. Although our financial results are reported in U.S. dollars, we also generate sales in various other currencies, including the euro and Canadian dollar. The weakening of these and other functional currencies against the U.S. dollar reduced our reported sales by approximately $870 million in the third quarter of 2015, as compared to the third quarter of 2014. Excluding the negative impact of foreign currency translation, our sales increased 3% in the third quarter of 2015, compared to the third quarter of 2014.

Our Adjusted EBIT

decreased 10% to $565 million in the third quarter of 2015, compared to the third quarter of 2014:

North America: Adjusted EBIT of $455 million for the third quarter of 2015 declined 4% compared to $475 million for the third quarter of 2014. Segment total sales increased 1% in the third quarter of 2015 compared to the third quarter of 2014.

Europe: Adjusted EBIT of $91 million for the third quarter of 2015 declined 15% or $16 million from the third quarter of 2014. Segment total sales declined 16% from the third quarter of 2014 to the third quarter of 2015.

Asia: Adjusted EBIT was $13 million in the third quarter of 2015, compared to $35 million for the third quarter of 2014. Segment total sales declined 11% in the third quarter of 2015 compared to the third quarter of 2014.

Rest of World: Our Adjusted EBIT loss of $7 million for the third quarter of 2015 compared to an Adjusted EBIT loss of $6 million in the third quarter of 2014. Segment total sales declined 39% to $115 million for the third quarter of 2015 compared to the third quarter of 2014.

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, net; and other (income) expense, net.

Magna International Inc. Third Quarter Report 2015

Capital Structure

During the third quarter of 2015, we issued $650 million 4.150% fixed-rate senior unsecured notes which mature on October 1, 2025 (the Senior Notes).

During the third quarter of 2015, we purchased for cancellation 7.2 million Common Shares for cash consideration of $346 million.

Lastly, subject to approval by the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE), our Board of Directors approved a new normal course issuer bid (NCIB) to purchase up to 40 million of our Common Shares, representing approximately 9.9% of our public float of Common Shares.

FINANCIAL RESULTS SUMMARY

During the third quarter of 2015, we posted sales of $7.66 billion, a decrease of 7% from the third quarter of 2014. This lower sales level was substantially a result of a decrease in reported U.S. dollar sales due to the weakening of foreign currencies against the U.S. dollar. Comparing the third quarter of 2015 to 2014:

North American vehicle production increased 4% and our North American production sales increased 2% to $4.28 billion;

European vehicle production increased 4% but our European production sales decreased 18% to $1.70 billion;

Asian production sales decreased 12% to $346 million;

Rest of World production sales decreased 38% to $111 million;

Complete vehicle assembly volumes decreased 28% and sales decreased 32% to $522 million; and

Tooling, engineering and other sales increased 8% to $705 million.

During the third quarter of 2015, we earned income from continuing operations before income taxes of $680 million compared to $611 million for the third quarter of 2014. Excluding other (income) expense, net (Other Income or Other Expense), as discussed in the Other Income section, income from continuing operations before income taxes decreased $62 million primarily as a result of:

operational inefficiencies at certain facilities, in particular at certain body and chassis operations in North America;

the negative impact of foreign exchange translation from the weakening of foreign currencies, including the Canadian dollar and euro, each against the U.S. dollar;

higher launch costs;

lower recoveries associated with scrap steel;

insurance recoveries, during the third quarter of 2014, related to a fire at a body and chassis facility in North America;

increased pre-operating costs incurred at new facilities; and

net customer price concessions subsequent to the third quarter of 2014.

These factors were partially offset by:

incremental margin earned on new programs that launched during or subsequent to the third quarter of 2014;

lower warranty costs of $21 million;

decreased commodity costs;

the expiration, at the end of 2014, of our consulting agreements with Frank Stronach;

higher equity income; and

productivity and efficiency improvements at certain facilities.

During the third quarter of 2015, net income attributable to Magna International Inc. from continuing operations was $470 million, a decrease of $17 million compared to the third quarter of 2014 and diluted earnings per share from continuing operations decreased $0.01 to $1.13 for the third quarter of 2015 compared to the third quarter of 2014. Other Income and Other Expense, after tax, as discussed in the Other Income section, impacted net income attributable to Magna International Inc. from continuing operations and diluted earnings per share from continuing operations as follows:

For the three months ended September 30,

Net Income

Diluted

Attributable

Earnings

to Magna

per Share

Other (income) expense, net

Income tax effect

Excluding the $68 million positive impact for the third quarter of 2015 and the $6 million negative impact for the third quarter of 2014, net income attributable to Magna International Inc. from continuing operations for the third quarter of 2015 decreased $91 million compared to the third quarter of 2014.

Excluding the $0.16 per share positive impact for the third quarter of 2015 and the $0.01 per share negative impact for

the third quarter of 2014, diluted earnings per share from continuing operations decreased $0.18, as a result of the decrease in net income attributable to Magna International Inc. from continuing operations partially offset by a decrease in the weighted average number of diluted shares outstanding during the third quarter of 2015. The decrease in the weighted average number of diluted shares outstanding was due to the purchase and cancellation of Common Shares, during or subsequent to the third quarter of 2014, pursuant to our normal course issuer bids.

INDUSTRY TRENDS AND RISKS

Our operating results are primarily dependent upon the levels of North American and European car and light truck production by our customers and the relative amount of content we have on various programs. Original equipment manufacturers (OEMs) production volumes in different regions may be impacted by factors which may vary from one region to the next, including but not limited to: general economic and political conditions; consumer confidence levels; interest rates; credit availability; energy and fuel prices; relative currency values; commodities prices; international conflicts; labour relations issues; regulatory requirements; trade agreements; infrastructure; legislative changes; and environmental emissions and safety standards. These factors together with other factors affecting our performance such as: operational inefficiencies; costs incurred to launch new or takeover business; price reduction pressures from our customers; warranty and recall costs; commodities and scrap prices; restructuring, downsizing and other significant non-recurring costs; and the financial condition of our supply base, are discussed in our Annual Information Form and Annual Report on Form 40-F, each in respect of the year ended December 31, 2014, and remain substantially unchanged in respect of the third quarter ended September 30, 2015, other than the potential impact on production volumes and/or other consequences as a result of the recent Volkswagen diesel engine emissions investigations, which we continue to monitor.

RESULTS OF OPERATIONS

Average Foreign Exchange

For the nine months

Change

1 Canadian dollar equals U.S. dollars

1 euro equals U.S. dollars

1 British pound equals U.S. dollars

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 changes in these foreign exchange rates for the three months and nine months ended September 30, 2015 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, foreign exchange gains and losses on revaluation and/or settlement of monetary items denominated in a currency other than an operations functional currency impact reported results. These gains and losses are recorded in selling, general and administrative expense.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015

Vehicle Production Volumes

(millions of units)

External Production

Complete Vehicle Assembly

Tooling, Engineering and Other

Total Sales

External Production Sales - North America

External production sales in North America increased 2% or $77 million to $4.28 billion for the third quarter of 2015 compared to $4.20 billion for the third quarter of 2014, primarily as a result of:

the launch of new programs during or subsequent to the third quarter of 2014, including the:

Lincoln MKX;

Ford Mustang;

Mercedes-Benz R-Class and GLE Coupe;

Chevrolet Colorado and GMC Canyon;

Ford Edge; and

Honda HR-V; and

higher production volumes on certain existing programs.

a $262 million decrease in reported U.S. dollar sales primarily as a result of the weakening of the Canadian dollar against the U.S. dollar;

net divestitures subsequent to the third quarter of 2014, which negatively impacted sales by $16 million;

programs that ended production during or subsequent to the third quarter of 2014; and

External Production Sales - Europe

External production sales in Europe decreased 18% or $364 million to $1.70 billion for the third quarter of 2015 compared to $2.06 billion for the third quarter of 2014, primarily as a result of:

a $344 million decrease in reported U.S. dollar sales as a result of the weakening of foreign currencies against the U.S. dollar, including the euro, Russian ruble, Czech koruna and Polish zloty;

lower production volumes on certain existing programs; and

These factors were partially offset by the launch of new programs during or subsequent to the third quarter of 2014, including the:

Skoda Superb;

BMW 2-Series;

Volkswagen Passat; and

Volkswagen Touran.

External Production Sales - Asia

External production sales in Asia decreased 12% or $45 million to $346 million for the third quarter of 2015 compared to $391 million for the third quarter of 2014, primarily as a result of:

a $15 million decrease in reported U.S. dollar sales as a result of the weakening of foreign currencies against the U.S. dollar, including the Chinese renminbi and South Korean won;

These factors were partially offset by the launch of new programs during or subsequent to the third quarter of 2014, primarily in China, India and Thailand.

External Production Sales - Rest of World

External production sales in Rest of World decreased 38% or $68 million to $111 million for the third quarter of 2015 compared to $179 million for the third quarter of 2014, primarily as a result of:

a $46 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; and

lower production volumes on certain existing programs.

the launch of new programs during or subsequent to the third quarter of 2014, primarily in Brazil; and

net customer price increases subsequent to the third quarter of 2014.

Complete Vehicle Assembly Sales

Complete Vehicle Assembly Sales

Complete Vehicle Assembly Volumes

(Units)

23,176

32,204

Complete vehicle assembly sales decreased 32% or $241 million to $522 million for the third quarter of 2015 compared to $763 million for the third quarter of 2014 and assembly volumes decreased 28% or 9,028 units.

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

a decrease in assembly volumes for the MINI Countryman and MINI Paceman; and

a $107 million decrease in reported U.S. dollar sales as a result of the weakening of the euro against the U.S. dollar.

Tooling, Engineering and Other Sales

Tooling, engineering and other sales increased 8% or $55 million to $705 million for the third quarter of 2015 compared to $650 million for the third quarter of 2014.

In the third quarter of 2015, the major programs for which we recorded tooling, engineering and other sales were the:

Audi A4;

Chevrolet Cruze;

Chevrolet Equinox and GMC Terrain;

GMC Acadia, Buick Enclave and Chevrolet Traverse;

Opel Astra;

Volkswagen Golf:

Volkswagen Touran; and

Skoda Superb.

In the third quarter of 2014, the major programs for which we recorded tooling, engineering and other sales were the:

BMW X6;

Dodge Charger;

MINI Countryman;

Volkswagen Golf;

QOROS 3; and

Mercedes-Benz M-Class.

The weakening of certain foreign currencies against the U.S. dollar, including the euro and Canadian dollar had an unfavourable impact of $96 million on our reported tooling, engineering and other sales.

Cost of Goods Sold and Gross Margin

Cost of goods sold

Material

Direct labour

Overhead

Gross margin

Gross margin as a percentage of sales

Cost of goods sold decreased $482 million to $6.59 billion for the third quarter of 2015 compared to $7.08 billion for the third quarter of 2014 primarily as a result of:

a decrease in reported U.S. dollar cost of goods sold as a result of the weakening of foreign currencies against the U.S. dollar, including the euro and Canadian dollar;

decreased commodity costs; and

higher material, overhead and labour costs associated with the increase in local currency sales, in particular in North America;

insurance recoveries, during the third quarter of 2014, related to a fire at a body and chassis facility in North America; and

increased pre-operating costs incurred at new facilities.

Gross margin decreased $104 million to $1.07 billion for the third quarter of 2015 compared to $1.17 billion for the third quarter of 2014 and gross margin as a percentage of sales decreased to 13.9% for the third quarter of 2015 compared to 14.2% for the third quarter of 2014. The decrease in gross margin as a percentage of sales was primarily due to:

an increase in the proportion of tooling, engineering and other sales relative to total sales, that have low or no margins;

a decrease in the proportion of complete vehicle assembly sales relative to total sales, which have a higher material content than our consolidated average;

lower warranty costs;

a decrease in the proportion of sales earned in Europe relative to total sales, which have a lower margin than our consolidated average, primarily due to the weakening of the euro against the U.S. dollar; and

Depreciation and Amortization

Depreciation and amortization costs decreased $17 million to $197 million for the third quarter of 2015 compared to $214 million for the third quarter of 2014. The lower depreciation and amortization was primarily as a result of

a decrease in reported U.S. dollar depreciation and amortization largely as a result of the weakening of the euro, Canadian dollar and Russian ruble, each against the U.S. dollar partially offset by higher depreciation related to new facilities.

Selling, General and Administrative (SG&A)

SG&A expense as a percentage of sales was 4.7% for the third quarter of 2015 compared to 4.6% for the third quarter of 2014. SG&A expense decreased $24 million to $358 million for the third quarter of 2015 compared to $382 million for the third quarter of 2014 primarily as a result of:

the weakening of the Canadian dollar, euro, Russian ruble and Brazilian real, each against the U.S. dollar; and

the expiration, at the end of 2014, of our consulting agreements with Frank Stronach.

higher consulting costs; and

a $2 million net decrease in valuation gains in respect of asset-backed commercial paper (ABCP).

Equity Income

Equity income increased $1 million to $52 million for the third quarter of 2015 compared to $51 million for the third quarter of 2014.

Other (Income) Expense, net

During the third quarter of 2015, we entered into a joint venture arrangement for the manufacture and sale of roof and other accessories for the Jeep market to OEM as well as aftermarket customers. We contributed two manufacturing facilities and received a 49% interest in the newly formed joint venture and cash proceeds of $118 million. Total consideration was valued at $160 million, and as a result we recognized a gain of $136 million ($80 million after tax). We will account for our ownership as an equity investment since we have significant influence through our voting rights, but do not control the joint venture.

In addition, during the third quarter of 2015 we recorded net restructuring charges of $12 million ($12 million after tax) in Europe at our exterior systems operations.

During the second quarter of 2015, we sold our

battery pack business to Samsung SDI for proceeds of $120 million, resulting in a gain of $57 million ($42 million after tax).

During the three and nine months ended September 30, 2014, we recorded net restructuring charges of $7 million and $40 million ($6 million and $36 million after tax), respectively, in Europe at our exterior systems operations

Segment Analysis

Given the differences between the regions in which we operate, our operations are segmented on a geographic basis. Consistent with the above, our internal financial reporting separately segments key internal operating performance measures between North America, Europe, Asia 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, net; and other expense, net.

Total Sales

Adjusted EBIT

Corporate and Other

Total reportable segments

Excluded from Adjusted EBIT for the three months ended September 30, 2015 and 2014 were the following Other Income and Other Expense items, which have been discussed in the Other Income section.

North America

Gain on sale

Restructuring

Adjusted EBIT in North America decreased $20 million to $455 million for the third quarter of 2015 compared to $475 million for the third quarter of 2014 primarily as a result of:

a decrease in reported U.S. dollar EBIT due to the weakening of the Canadian dollar against the U.S. dollar;

operational inefficiencies at certain facilities, in particular at certain body and chassis operations;

a greater amount of employee profit sharing; and

lower warranty costs of $14 million;

lower affiliation fees paid to Corporate;

margins earned on higher production sales;

Adjusted EBIT in Europe decreased $16 million to $91 million for the third quarter of 2015 compared to $107 million for the third quarter of 2014 primarily as a result of:

a decrease in reported U.S. dollar EBIT as a result of the weakening of foreign currencies against the U.S. dollar, including the euro and Czech koruna;

operational inefficiencies at certain facilities;

higher launch costs; and

lower warranty costs of $6 million;

decreased pre-operating costs incurred at new facilities;

productivity and efficiency improvements at certain facilities;

a lower amount of employee profit sharing;

lower incentive compensation; and

higher equity income.

Adjusted EBIT in Asia decreased $22 million to $13 million for the third quarter of 2015 compared to $35 million for the third quarter of 2014 primarily as a result of:

reduced margins due to lower production sales;

lower equity income;

lower affiliation fees paid to Corporate; and

lower warranty costs of $1 million.

Adjusted EBIT in Rest of World decreased $1 million to a loss of $7 million for the third quarter of 2015 compared to a loss of $6 million for the third quarter of 2014 primarily as a result of:

higher production costs, including inflationary increases, that we have not been fully successful in passing through to our customers; and

higher incentive compensation.

a decrease in reported U.S. dollar EBIT loss due to the weakening of the Brazilian real against the U.S. dollar;

Corporate and Other

Corporate and Other Adjusted EBIT decreased $3 million to $13 million for the third quarter of 2015 compared to $16 million for the third quarter of 2014 primarily as a result of:

a decrease in affiliation fees earned from our divisions; and

a $2 million net decrease in valuation gains in respect of ABCP.

These factors were partially offset by the expiration, at the end of 2014, of our consulting agreements with Frank Stronach.

Interest Expense, net

Interest expense, net was $9 million in the third quarters of 2015 and 2014. Lower interest income in North America was offset by lower interest expense in Asia.

Income from Continuing Operations before Income Taxes

Income from continuing operations before income taxes increased $69 million to $680 million for the third quarter of 2015 compared to $611 million for the third quarter of 2014. Excluding Other Income and Other Expense, discussed in the Other Income section, income from continuing operations before income taxes for the third quarter of 2015 decreased $62 million. The decrease in income from continuing operations before income taxes is the result of the decrease in Adjusted EBIT, as discussed above.

Income taxes as reported

Tax effect on Other Income and Other Expense

Excluding Other Income and Other Expense, after tax, the effective income tax rate increased to 27.9% for the third quarter of 2015 compared to 20.4% for the third quarter of 2014 primarily as a result of

lower favourable audit settlements and an increase in permanent items.

Income (loss) from Discontinued Operations, net of tax

Income...


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