Driving the
Future of Mobility
2016 Annual Report
Through leadership and a
commitment to innovation,
Magna continues to be
the go-to industry partner.
Message to
Shareholders
2016 was another
record-breaking year
for Magna, our investors
and employees.
We continued to deliver sales
and earnings per share growth
and stayed focused on executing
our strategic plan. Magna has a
compelling business model that
includes growing at a rate faster
than vehicle production, expanding
margins over time, generating
strong cash flow and delivering
solid returns. These elements
have allowed us to create value
for shareholders, including our
employees, for many years and we
believe this model will drive our
future results as well.
When I reflect on our continued strong performance,
it stems from our vision for the industry and our
strategic approach which drive Magna's growth
in the automotive space.
Magna is:
Magna is well-positioned
with the expertise and
global experience to
help enable the future
of mobility.
• Experienced in areas that will define the future
of transportation, including safety, electrification,
autonomy, new mobility and connectivity.
• Recognized as a world-class manufacturer
with a global footprint and expertise to meet
customer needs.
Our strong cash flow generation allows us to
both invest for future growth and return capital
to shareholders.
Growth Product Areas
Our product portfolio is meeting the challenges
that come with the transformation of the automotive
industry. We expect our highest growth opportunities
between now and 2019 to include these five key
product areas:
• Poised for continued above-industry-average
growth.
• Best positioned to respond to automotive shifts
due to our breadth of technology expertise
and business agility.
• Demand for Advanced Driver Assistance Systems
(ADAS) – the building blocks for autonomous vehicle
technology – is expected to continue to grow around
the world. Building on our leadership position in
cameras, we expect strong sales growth over the
next few years as we offer a full suite
of sensing systems – camera, ultrasonic,
RADAR and LiDAR – to complement
our system integration capability and
enable the emerging levels of autonomy.
• Our powertrain business is positioning
itself to benefit from the longer-term
electrification and fuel efficiency trends in
the industry. Over the next three years,
the most significant driver of this area
is our transmissions business acquired
from GETRAG.
• Our body and chassis expertise assists
automakers with addressing the increased
legislative pressures on carbon emissions.
Our ability to design and manufacture
lightweight solutions is demonstrated through
the use of innovative processes such as
high pressure aluminum die-casting, hot
forming and advancements in joining
of multi-material assemblies.
• We continue to win new business in
seating as customers recognize the value
of our EZ-Entry mechanism solutions and
quick adjust features which differentiate
us and give us the ability to deliver on
complex projects.
Helping Shape Future Mobility
Our industry is rapidly changing and we
expect the next decade and beyond to bring
an enormous amount of change driven by
technological advances. Magna welcomes
this change. Our in-depth systems expertise
across our broad capabilities gives us holistic
vehicle knowledge, and our electronics know-how
and flexible operating structure allow us to quickly
adapt. This is what differentiates us from our
competition. We have a clear understanding of
the global trends and how they impact automotive,
and we are using that foresight to engineer future
systems. We are empowering our employees
and partnering with customers, start-ups, and
universities to generate innovative ideas and
bring them to market. The next 10 – 15 years
will include an influx of autonomous vehicles,
electrification, new modes of transportation
and the rise of sharing economies. Magna is
ready with the expertise and global experience
required to help enable the future of mobility.
Thank you to our stakeholders – our investors,
our customers, our industry partners and our
employees, including those who have joined the
Magna family through recent acquisitions – for
driving our continued success.
• A key differentiating factor for Magna is
Sincerely,
our complete vehicle assembly capability.
In 2016, we announced new contracts
with BMW and Jaguar Land Rover and
are well-positioned to support any new
players that enter the industry.
Don Walker
(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:54)(cid:1117)(cid:74)(cid:76)(cid:89)
Key Figures at-a-Glance
I am very pleased with our results for
2016, a year in which we posted a number
of records, including sales, earnings per
share and cash flow from operating
activities. We also generated another
strong return on shareholders' equity
last year. This was achieved even with
the acquisition of GETRAG, which was
an important investment for the future
of Magna.
Our financial strategy of investing in our
business, both through capital spending
and acquisitions, while at the same
time returning capital to shareholders,
is unchanged. We recently announced
another increase to our quarterly
dividend, making 2017 our eighth
consecutive year of such increases.
Going forward, the changing mobility
landscape, together with our broad
capabilities and ability to commercialize
technology, are expected to bring
a great deal of opportunity for Magna's
continued growth. We remain highly
focused on a disciplined approach
to investment in order to translate
growth into increased returns, margins
and free cash flow. Together, these
are what we believe make Magna a
compelling long-term investment.
Vince Galifi
Executive Vice-President
and Chief Financial Officer
SALES
U.S. $ MILLIONS
13%
36,445
32,134
DILUTED EPS FROM
CONTINUING OPERATIONS
U.S. $
16%1
5.16
4.72
4.431
2015
2016
2015
2016
CASH FLOW FROM
OPERATING ACTIVITIES
U.S. $ MILLIONS
RETURN
ON EQUITY2
DIVIDENDS PAID PER SHARE
U.S. $
16%
Compound Average
Growth Rate
1.00
45%
3,386
2,332
20.6%
20.4%
0.88
0.76
0.64
0.55
2015
2016
2015
2016
2012 2013 2014 2015 2016
1
2
2015 diluted earnings per share from continuing operations includes $122 million in after tax gains on disposals, contributing $0.29 to diluted
earnings per share, as discussed in the ''Other Expense (Income), net'' section of the MD&A on page 11 of this Annual Report. 16% is the
percentage change between $4.43 and $5.16.
Return on Equity is a non-GAAP financial measure that has no standardized meaning under U.S. GAAP. Due to the non-standardized
definition, it may not be comparable to the calculation of similar measures of other companies. Return on Equity is defined as net
income attributable to Magna International Inc. from continuing operations divided by Average Equity. The 2015 calculation
excludes the $122 million gain (after tax) referred to in note 1 above.
A Worldwide Network of
World-Class Facilities
With hundreds of facilities in 29 countries, Magna can engineer, manufacture
and deliver mobility solutions to create superior value for our customers and
the industry.
Americas
149
27
78,000 Employees
Canada 50 11
United States 55 13
Mexico 30 1
Argentina 3
Brazil 11 2
54
25
22,000 Employees
Asia
China 40 13
India 10 5
Japan 3
Korea 3 2
Taiwan 1
Thailand 1 1
Europe
114
50
55,000 Employees
Austria 15 8
Belgium 1
Bulgaria 1
Czech Republic 8 1
England 9 1
France 5 2
Germany 42 33
Hungary 2
Ireland 1
Italy 4 3
Poland 7
Romania 1
Russia 7
Serbia 1
Slovak Republic 3
Spain 3
Sweden 2
Turkey 4
Manufacturing / Assembly Facilities
Engineering / Product Development / Sales Centres
*As of December 31, 2016, manufacturing operations, product
development, engineering and sales centres and employee
figures include certain equity-accounted operations.
Electronics
Powertrain
Body & Chassis
Seating
We are constantly strengthening our capabilities and systems knowledge
to meet emerging consumer and industry needs. As we expand, we will
continue to help support the future mobility landscape.
155,000 Employees*
29 Countries*
317 Manufacturing / Assembly Facilities*
102 Engineering / Product Development / Sales Centres*
$36.4 Billion in Sales
We set production records with Mercedes-Benz,
producing 20,000 G-Class in 2016 alone,
and more than 250,000 overall.
Magna received top innovation honors from
the Society of Plastics Engineers for its active
grille shutter technology, carbon fiber hood on
the Cadillac ATS-V and CTS-V, and the grille
opening reinforcement on the Ford Mustang
Shelby Cobra GT350.
Magna's multi-patented EYERIS® technology
supports the Ford Super Duty Trailer Reverse
Guidance System to offer drivers a best-in-class
360-degree view, and make trailering safer and
more convenient.
Closures
Vision Systems
Exteriors
Vehicle Engineering
& Contract
Manufacturing
Innovation
for the Future
Mobility Landscape
Magna is flexible enough to adapt and grow through the
transformation taking place in the automotive industry.
It's a two-pronged approach of creating world-class
products and systems for global automakers, while
also developing new potential technologies for those
providing mobility as a service. Spanning across both in
the new mobility landscape plays to Magna's strengths.
Through our broad product capabilities we
continue to generate opportunities for technology
and product advancement, while at the same time
positioning ourselves for the expected disruptive
changes. Magna has the breadth of capabilities
that help tackle the technology challenges of
today and define what future systems will be
needed 10 – 15 years from now.
Two key areas where we see this most coming
into play include Advanced Driver Assistance
Systems (ADAS) and powertrain electrification.
ADAS innovations, for example, along with trends
towards urbanization and changing demographics,
are creating opportunities for new mobility solutions.
These solutions include varying levels of autonomy,
system integration and connected services with use
cases from cities to highway environments. ADAS is
setting the pace of technology change in the industry
and we are well-positioned with our complete sensor
fusion expertise that enables autonomous features.
Electrification is another area that will drive change
and opportunity. Our complete-vehicle knowledge
supports our electrified powertrain products. These
are based on a platform approach to maximize
economies of scale, where increasing numbers of
vehicles will be produced with a range of hybrid and
Swamy Kotagiri
Chief Technology Officer
The pace of innovation in the
automotive industry is like nothing
we have ever seen before. A new
mobility landscape is emerging,
creating even more challenges
and opportunities in an enlarging
ecosystem. For Magna, this
means leveraging our culture
of innovation and embracing a
new level of innovation outreach
with universities, start-ups and
other industries.
full-electric propulsion systems. We will leverage
these platforms to bring primary powertrain systems
and electric AWD systems to our customers and
new mobility partners.
Advanced technologies that span across our
entire product portfolio go beyond today's owned
vehicles to include shared vehicles, ride-hailing
services and new forms of short-distance travel
that complement public transportation. All these
modes of transportation will be smart and connected
to provide more convenient, safe and clean mobility.
We believe Magna is the best-positioned automotive
supplier to deliver innovations for all those who share
the road now and in the new mobility landscape.
As the industry continues to transform, Magna's
interaction in the investor and start-up ecosystem
is gaining momentum. Such activities ultimately
help Magna be at the forefront of innovation in
the emerging new mobility landscape.
Our open for business mentality
has led to an investment portfolio
of 13 new partnerships.
We established an advanced technology
advisory board which includes leaders
from their respective fields with more
than 180 years of collective experience
in product innovation and the
implementation of new technologies
and/or disruptive business models.
Magna's internal employee innovation
challenge, which seeks ideas from within
the company, serves as an incubator for
future developments. In two years, more
than 2,000 ideas have been submitted.
From over 800 technology subjects,
we have recently investigated more
than 86 new potential innovations
which have led to 22 active projects.
We have ongoing innovative research
projects with several world-renowned
universities including MIT and the
University of Cambridge.
We have invested in several venture
capital organizations, collaborating
on future technology ventures.
Smarter
Cleaner
Comfort, Convenience
and Connectivity
Efficiency and
Sustainability
DESIGNING AND DELIVERING AN INSPIRED,
BEST-IN-CLASS CABIN EXPERIENCE
OPTIMIZING THE USE OF ENERGY TO MEET THE
NEEDS OF OUR CUSTOMERS AND OUR PLANET
Smart Seats
etelligentDRIVE™
While there is much talk about
autonomous-drive and connected-vehicle
technologies, automakers are still challenged
to improve fuel efficiency. Magna continues
to develop innovative powertrain products
in response to global trends driven by legislation
and consumer preferences to improve the
environmental impact of passenger vehicles.
New products under development at Magna
include powertrain systems and modules
for vehicles equipped with 48-volt systems
or mild hybrids as well as high-voltage
systems including full hybrid, plug-in
hybrid and electric vehicle powertrains.
And we have further strengthened our
ability to provide complete powertrain
systems with the acquisition of GETRAG.
In an industry as advanced as automotive,
balancing complexity with comfort and
convenience can be challenging, but at
Magna we see it as opportunity. For example,
think about automotive seating: for Magna,
a seat is a conduit to further the interaction
between driver and vehicle, especially as the
industry prepares for autonomous driving.
Today we are taking our seating expertise
to a new level with our health-and-wellness
concept. This new technology includes many
features, such as the ability to measure the
human body and use the data to detect
drowsiness and the alertness level of the
driver. Increased levels of autonomy will
require the vehicle itself to determine if the
driver is conditioned to resume
control. With more than 25%
of accidents around the
world reportedly caused
by drowsy drivers, this
innovation can be a
true game-changer for
automotive safety.
Safer
Lighter
Active and
Passive Safety
Lightweight
Material and Science
ENGINEERING PROTECTION AND PEACE OF MIND
FOR ALL WHO SHARE THE ROAD
DRIVING PERFORMANCE AND QUALITY
THROUGH INNOVATIVE MASS REDUCTION
Autonomous
Lightweight Door Module
Vehicle safety is rapidly changing. Providing
robust active technologies to avoid an accident,
not just protect the driver and passenger
after an accident, is the ultimate goal. Today,
our electronics capabilities offer features that
enable autonomy at different levels. We have
developed many of these features on the road
today, such as automated emergency braking,
trailer-tow assist, lane-departure warning,
lane-keep assist and adaptive cruise control.
Building on our leadership position in driver
assistance systems and complete-vehicle
expertise, we have the ability to efficiently
combine multiple sensors to develop robust
systems as vehicles continue to progress
towards full autonomy. We also continue to
work with the broader ecosystem to address
topics such as data privacy and cyber security.
While there is much debate about the future
timing of autonomous driving, one thing
is clear: Magna intends
to play a critical role.
Start from scratch and reimagine a highly
engineered product. That's what our Magna
team of experts did when it came to the way
we think about the design, development
and material-use of a vehicle door. Magna,
in cooperation with the U.S. Department of
Energy and partners FCA and Grupo Antolin,
developed a new, ultralight door architecture
that achieved roughly 43% mass savings
compared to an average current production
door. Magna's advanced engineering
team combined its unique, full-vehicle
perspective on the design with an inventive
mix of materials and technology to tackle the
challenge of significant weight reduction.
This was developed in less than 10 months
while keeping the cost within accepted
parameters and providing a solution that
applies to approximately 70% of the
light vehicle market.
Magna International Inc.
Financial
Review 2016
and Other Information
1 Management's Discussion and Analysis of Results of Operations
and Financial Position
25 Reports of Independent Registered Public Accounting Firms
27 Consolidated Statements of Income
28 Consolidated Statements of Comprehensive Income
29 Consolidated Balance Sheets
30 Consolidated Statements of Cash Flows
31 Consolidated Statements of Changes in Equity
32 Notes to the Consolidated Financial Statements
61 Supplementary Financial and Share Information
Corporate Directory (inside back cover)
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.
In 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
Management’s Discussion and Analysis reflects the results of continuing operations, unless otherwise noted.
This MD&A should be read in conjunction with the audited consolidated financial statements for the year ended
December 31, 2016.
This MD&A has been prepared as at March 9, 2017.
Non-GAAP Financial Measures
This MD&A includes the use of Gross margin, Gross margin as a percentage of sales, and Adjusted EBIT. Gross margin is calculated
by subtracting Cost of goods sold from Sales, and Gross margin as a percentage of sales is calculated as Gross margin divided by
Sales. Adjusted EBIT is calculated by taking net income from continuing operations and adding back income taxes, interest
expense, net, and other expense (income), net, as presented on the face of the Consolidated Statements of Income. Gross margin,
Gross margin as a percentage of sales and Adjusted EBIT are all non-GAAP financial measures that have no standardized meaning
under U.S. GAAP. Due to the non-standardized definition, Gross margin, Gross margin as a percentage of sales and Adjusted EBIT
may not be comparable to the calculation of similar measures of other companies. We believe that Gross margin and Gross margin
as a percentage of sales facilitate a comparison of our performance with prior periods, and provide investors with a more consistent
basis for comparing our results from period to period. Similarly, we believe that Adjusted EBIT provides useful information to our
investors as an appropriate measure of our operational performance as it excludes items that are not reflective of ongoing operating
profit or loss. The presentation of non-GAAP financial measures should not be considered in isolation or as a substitute for the
Company's related financial results prepared in accordance with U.S. GAAP.
HIGHLIGHTS
(cid:127) We posted new records in total sales, income from continuing operations before income taxes and diluted earnings per share
(cid:127)
from continuing operations in 2016.
Total sales increased 13% to $36.45 billion in 2016, compared to $32.13 billion in 2015. The 13% increase is substantially higher
than the 4% growth in global light vehicle production in 2016.
(cid:127)
North American production sales increased 9%, compared to North American light vehicle production which
increased 2%.
European production sales increased 26%, while European light vehicle production was up 2%.
Asian production sales rose 38%, compared to a 6% increase in Asian light vehicle production.
(cid:127)
(cid:127)
Diluted earnings per share from continuing operations increased 9% to $5.16, compared to $4.72 in 2015.
(cid:127)
(cid:127) We generated cash from operating activities of $3.39 billion, 45% higher than the $2.33 billion generated in 2015.
(cid:127) We further invested for our future, including:
(cid:127)
(cid:127)
(cid:127)
$1.93 billion in acquisitions, including the GETRAG Group of Companies ("GETRAG"), one of the world's leading
independent suppliers of automotive transmissions, and a leader in the market for dual-clutch transmissions ("DCTs"), a
product which is expected to experience high growth over the next decade;
$1.81 billion in fixed asset spending; and
$478 million in investment and other asset spending.
(cid:127) We returned $1.30 billion to shareholders, through $913 million in share repurchases and a further $385 million in dividends.
OVERVIEW
Our Business(1)
We are a leading global automotive supplier with 317 manufacturing operations and 102 product development, engineering and
sales centres in 29 countries. We have over 155,000 employees focused on delivering superior value to our customers through
innovative products and processes, and world class manufacturing. We have complete vehicle engineering and contract
manufacturing expertise, as well as product capabilities which include body, chassis, exterior, seating, powertrain, active driver
assistance, vision, closure and roof systems. We also have electronic and software capabilities across many of these areas. 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.
1 Manufacturing operations, product development, engineering and sales centres and employee figures include certain equity-accounted operations.
1
MAGNA INTERNATIONAL INC.
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:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
evolving concepts of mobility, including shared mobility, particularly in urban areas;
the growing importance of electronics in the automotive value chain;
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, Eastern Europe and other non-traditional markets, including
accelerated movement of component and vehicle design, development, engineering and manufacturing to certain of
these markets;
the growth of the B to D vehicle segments (subcompact to mid-size cars and SUVs/CUVs), particularly in developing markets;
the extent to which innovation in the automotive industry is being driven by governmental regulation of fuel economy and
carbon dioxide/greenhouse gas emissions, vehicle safety and vehicle recyclability;
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; and
(cid:127)
the 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:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
The global automotive industry is cyclical, with the potential for regional differences in timing of expansion and contraction. A
worsening of economic or political conditions in North America, Europe or Asia, including through rising interest rates or
inflation, rising unemployment, increasing energy prices, declining real estate values, increased volatility in global capital
markets, international conflicts, sovereign debt concerns, an increase in protectionist trade measures, collapse of multilateral
trade or currency unions and/or other factors, may result in lower consumer confidence. Lower consumer confidence typically
results in lower vehicle sales levels, which in turn would typically result in lower vehicle production levels. A significant decline
in vehicle production volumes from current levels could have a material adverse effect on our profitability.
The election of protectionist governments could lead to the withdrawal of some countries from, or renegotiation of, multilateral
trade, economic or currency regimes such as the European Union, North American Free Trade Agreement and Trans-Pacific
Partnership. The automobile industry is a highly globalized industry which is currently dependent on open borders and the free
movement of goods, services, people and capital, particularly in Europe and North America. The continued growth of
protectionist sentiments and implementation of measures which impede the free movement of goods, services, people and
capital could have a material adverse effect on our operations, profitability or results of operations.
The uncertainty created by rapidly changing economic or political conditions may impact our ability to plan effectively for our
business over the short- and medium-terms. For example, we may establish production capacity at different facilities, including
our complete vehicle assembly operations in Austria, based on production volumes which fail to materialize. A material variation
between our planning assumptions and actual outcomes could have a material adverse effect on our profitability or financial
condition.
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 or euro, 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.
The automotive industry has in recent years been the subject of increased government enforcement of antitrust and
competition laws, particularly by the United States Department of Justice and the European Commission. Antitrust
enforcement proceedings can often continue for several years. Where wrongful conduct is found, the relevant antitrust
authority can, depending on the jurisdiction, initiate administrative or criminal legal proceedings and impose administrative or
criminal fines or penalties.
In September 2014, the Conselho Administrativo de Defesa Economica, Brazil's Federal competition authority, attended at one
of our operating divisions in Brazil to obtain information in connection with an ongoing antitrust investigation relating to
suppliers of automotive door latches and related products. At this time, management is unable to predict the duration or
outcome of the Brazilian investigation, including whether any of our operating divisions will be found liable for any violation of
law or the extent or magnitude of any liability, if found to be liable.
2016 Annual Report – MD&A
2
Our policy is to comply with all applicable laws, including antitrust and competition laws. We previously initiated a global review
focused on antitrust risk led by a team of external counsel. If any antitrust violation is found as a result of such review, a
regulatory investigation or otherwise, we could be subject to fines, penalties, restitution settlements and civil, administrative or
criminal legal proceedings that could have a material adverse effect on our profitability in the year in which any such fine or
penalty is imposed or the outcome of any such proceeding is determined. Additionally, we could be subject to other
consequences, including reputational damage, which could have a material adverse effect on our operations.
(cid:127)
(cid:127)
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, as well as factors related to manufacturing processes,
tooling, equipment, employees, initial product quality and other factors. Our failure to successfully launch material new or
takeover business could have a material adverse effect on our profitability.
Although we are working to turn around underperforming operating divisions, there is no guarantee that we will be successful
in doing so in the short to medium term or that the expected improvements will be fully realized or realized at all. We may also
experience underperformance at operating divisions not currently experiencing any issues. Significant underperformance of
one or more operating divisions could have a material adverse effect on our profitability and operations.
(cid:127) We face ongoing pricing pressure from OEMs, including through: long-term supply agreements with mutually agreed price
reductions over the life of the agreement; incremental annual price concession demands; pressure to absorb costs related to
product design, engineering and tooling and other items previously paid for directly by OEMs; pressure to assume or offset
commodities cost increases; and refusal to fully offset inflationary price increases. OEMs possess significant leverage over
their suppliers due to their purchasing power and the highly competitive nature of the automotive supply industry. As a result of
the broad portfolio of parts we supply to our six largest OEM customers, such customers may be able to exert greater leverage
over us as compared to our competitors. We attempt to offset price concessions and costs in a number of ways, including
through negotiations with our customers, improved operating efficiencies and cost reduction efforts. Our inability to fully offset
price concessions or costs previously paid for by OEMs could have a material adverse effect on our profitability.
(cid:127) 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 our powertrain systems programs and 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, or our own, 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 or acquired by us. The
obligation to repair or replace such products could have a material adverse effect on our profitability and financial condition.
(cid:127) We intend to continue to pursue acquisitions in those product areas which we have identified as key to our business strategy.
However, 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 and/or such acquisitions may be dilutive in the short to medium term, which could have a material
adverse effect on our profitability.
(cid:127)
(cid:127)
incremental regulatory/compliance, pricing, supply chain, commodities,
The successful completion of one or more significant acquisitions could increase our risk profile, including through the
assumption of
litigation,
environmental, pensions, warranty, recall, IT, tax or other risks. Although we seek to conduct appropriate levels of due diligence
on 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 facilities and/or personnel; or other limitations in the due diligence process. Additionally, we may
identify risks and liabilities through our acquisition due diligence efforts that we are not able to sufficiently mitigate through
appropriate contractual protections. The realization of any such risks could have a material adverse effect on our profitability.
labour relations,
Although we supply parts to all of the leading OEMs, a significant majority of our sales are to six customers: General Motors,
Ford, Fiat Chrysler, Daimler, BMW and Volkswagen. 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.
(cid:127) 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.
3
MAGNA INTERNATIONAL INC.
(cid:127)
In light of the amount of business we currently have with our largest customers in North America and Europe, our opportunities
for incremental growth with these customers may be limited. The amount of business we have with Japanese, Korean and
Chinese-based OEMs generally lags that of our largest customers, due in part to the existing relationships between such
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 in North America and Europe. As a result,
our inability to grow our business with Asian-based OEMs could have a material adverse effect on our profitability.
(cid:127) While we continue to expand our manufacturing footprint with a view to taking advantage of opportunities in markets such as
China, India, Eastern Europe 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, civil and economic instability and uncertainty; corruption risks; 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; competition to attract and retain qualified employees; 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.
(cid:127)
The automotive supply industry is highly competitive and becoming more so. As a result of our diversified automotive business,
some of our competitors have greater market share than we do in product areas such as electronics or geographic regions such
as Asia, or increasing market share in such product areas or geographic regions which are experiencing higher growth rates.
With the growing importance of electronics in the automotive value chain, a number of electronics and semiconductor
companies have entered or expanded their presence in the automotive industry. Additionally, disruptive technology innovators
are developing high-value product and service offerings which traditional automotive suppliers may not be able to match.
Failure to successfully compete with existing or new competitors, including failure to grow sales of our electronics products or
services at or above the rate of growth of electronics content, could have an adverse effect on our operations and profitability.
(cid:127) While we continue to invest in technology and innovation which we believe will be critical to our long-term growth, the
automotive industry is experiencing rapid technological change and significant disruption. 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 we are unsuccessful or are less successful than our
competitors in consistently developing innovative products and/or processes, we may be placed at a competitive disadvantage,
which could have a material adverse effect on our profitability and financial condition.
(cid:127)
The risk profile of our business is changing with the growing importance to us of product areas such as powertrain and
electronics. As our business evolves, we may face new or heightened risks, including: challenges in quoting for profitable
returns on products with leading-edge technologies for which we may not have significant quoting experience; increased
warranty and recall risks on new products and leading-edge technologies; increased product liability risks on safety-related
products or systems; heightened risk of technological obsolescence of some of our products, processes and/or assets; and
difficulties in attracting or retaining employees with critical skills in high-demand areas. Realization of one or more such risks
could have a material adverse effect on our profitability, financial condition or operations.
(cid:127) We may sell some product lines and/or 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 profitability.
(cid:127) 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; OEM 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.
(cid:127)
(cid:127)
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, including as a result of restructuring actions
taken by us, our customers and other suppliers. We cannot predict whether or when any labour disruption may arise, or how
long such a disruption could last. 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.
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.
2016 Annual Report – MD&A
4
(cid:127) Our business is generally not seasonal. However, our sales and profits are closely related to our automotive customers' vehicle
production schedules. Our largest North American customers typically halt production for approximately two weeks in July and
one week in December. In addition, many of our customers in Europe typically shut down vehicle production during portions of
August and one week in December. These scheduled shutdowns of our customers' production facilities could cause our sales
and profitability to fluctuate when comparing fiscal quarters in any given year.
(cid:127)
(cid:127)
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.
Prices for certain key raw materials and commodities used in our parts, including steel and resin, can be volatile. To the extent
we are unable to offset commodity price increases by passing such 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. Some of our manufacturing facilities generate a significant amount of scrap steel and recover
some of the value through scrap steel sales. Scrap steel prices can also be volatile. Declines in scrap steel prices from time to
time could have an adverse effect on our profitability.
(cid:127) Our manufacturing facilities are subject to risks associated with natural disasters or other catastrophic event, including fires,
floods, hurricanes and earthquakes. The occurrence of any of these disasters or catastrophic event could cause the total or
partial destruction of our or our sub-supplier's 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 or catastrophic event at a manufacturing facility could have a material adverse
effect on our operations and profitability.
(cid:127)
(cid:127)
(cid:127)
The reliability and security of our information technology (IT) systems is important to our business and operations. Although we
have established and continue to enhance security controls intended to protect our IT systems and infrastructure, there is no
guarantee that such security measures will be effective in preventing unauthorized physical access or cyber-attacks. A
significant breach of our IT systems could: cause disruptions in our manufacturing operations; lead to the loss, destruction or
inappropriate use of sensitive data; or result in theft of our, our customers' or our suppliers' intellectual property or confidential
information. If any of the foregoing events occurs, we may be subject to a number of consequences, including reputational
damage, which could have a material adverse effect on our operations.
Some of our current and former employees in Canada, the United States and Germany participate in defined benefit pension
plans. Although such plans in North America have been closed to new participants, existing participants in Canada continue to
accrue benefits. Our defined benefit pension plans in Germany are not funded and plans in Canada and the United States may
not be fully funded. Our pension funding obligations in North America could increase significantly due to a reduction in plan
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. Depending on the
nature or duration of any potential proceedings or claims, we may incur substantial costs and expenses and may be required to
devote significant management time and resources to the matters. 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 and/or our Management's
Discussion & Analysis, we do not believe that any of the proceedings or claims to which we are party will have a material
adverse effect on our profitability; however, we cannot provide any assurance to this effect.
(cid:127) We have incurred losses in some countries which we may not be able to fully or partially offset against income we have earned
in those countries. In some cases, we may not be able to utilize these losses at all if we cannot generate profits in those
countries and/or if we have ceased conducting business in those countries altogether. Our inability to utilize tax losses could
materially adversely affect our profitability. At any given time, we may face other tax exposures arising out of changes in tax or
transfer pricing laws, tax reassessments or otherwise. To the extent we cannot implement measures to offset these
exposures, they may have a material adverse effect on our profitability.
(cid:127) We have in the past recorded significant impairment charges related to goodwill and long-lived assets and may do so again 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, as may the technological obsolescence of any of our products or
production assets. 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.
5
MAGNA INTERNATIONAL INC.
(cid:127) We believe we will have sufficient financial resources available to successfully execute our business plan, even in the event of
another global recession similar to that of 2008-2009. However, as a result of the reduction of our excess cash in connection
with our balance sheet strategy, we may have less financial flexibility than we have had in the last few years. 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.
(cid:127)
(cid:127)
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 level of 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
1 Canadian dollar equals U.S. dollars
1 euro equals U.S. dollars
1 British pound equals U.S. dollars
1 Chinese renminbi equals U.S. dollars
1 Brazilian real equals U.S. dollars
For the three months
ended December 31,
2015
Change
0.749
1.094
1.516
0.156
0.260
–
-
1%
- 18%
6%
-
+ 17%
2016
0.749
1.080
1.241
0.146
0.304
For the year
ended December 31,
2015
Change
0.784
1.111
1.529
0.159
0.305
-
-
-
-
4%
–
11%
5%
6%
2016
0.755
1.107
1.355
0.151
0.288
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 year ended
December 31, 2016 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
operation's functional currency impact reported results. These gains and losses are recorded in selling, general and administrative
expense.
2016 Annual Report – MD&A
6
RESULTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2016
Sales
Vehicle Production Volumes (millions of units)
North America
Europe
Sales
External Production
North America
Europe
Asia
Rest of World
Complete Vehicle Assembly
Tooling, Engineering and Other
Total Sales
External Production Sales - North America
2016
2015
Change
17.817
21.434
17.477
20.954
$ 19,381
9,140
2,217
439
2,190
3,078
$ 36,445
$ 17,759
7,252
1,612
454
2,357
2,700
$ 32,134
+ 2%
+ 2%
+ 9%
+ 26%
+ 38%
3%
-
-
7%
+ 14%
+ 13%
External production sales in North America increased 9% or $1.62 billion to $19.38 billion compared to $17.76 billion for 2015,
primarily as a result of:
(cid:127)
(cid:127)
the launch of new programs during or subsequent to 2015, including the:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
the acquisition of GETRAG during the first quarter of 2016, which positively impacted production sales by $593 million.
Chrysler Pacifica;
Ford F-Series Superduty;
Ford Edge and Lincoln MKX;
Chevrolet Malibu;
Cadillac XT5; and
Lincoln Continental; and
These factors were partially offset by:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
programs that ended production during or subsequent to 2015;
a $225 million decrease in reported U.S. dollar sales as a result of the weakening of foreign currencies against the U.S. dollar,
including the Canadian dollar;
the contribution of two manufacturing facilities into an equity-accounted joint venture during the third quarter of 2015, which
negatively impacted production sales by $67 million;
lower production volumes on certain existing programs; and
net customer price concessions subsequent to 2015.
External Production Sales - Europe
External production sales in Europe increased 26% or $1.89 billion to $9.14 billion compared to $7.25 billion for 2015, primarily as a
result of:
(cid:127)
(cid:127)
acquisitions during or subsequent to 2015, which positively impacted production sales by $1.42 billion, including GETRAG
which positively impacted production sales by $1.09 billion; and
the launch of new programs during or subsequent to 2015, including the:
(cid:127)
(cid:127)
(cid:127)
(cid:127) Mercedes-Benz E-Class; and
(cid:127)
Audi A4;
Audi A3 and A3 Sportback;
Skoda Superb;
BMW X1.
These factors were partially offset by:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
7
a $146 million decrease in reported U.S. dollar sales as a result of the weakening of foreign currencies against the U.S. dollar,
including the British pound, Turkish lira, Russian ruble and euro;
lower production volumes on the MINI Countryman and Paceman, as well as lower production content on the next generation
of these programs which launched during the fourth quarter of 2016;
lower production volumes on certain existing programs; and
net customer price concessions subsequent to 2015.
MAGNA INTERNATIONAL INC.
External Production Sales - Asia
External production sales in Asia increased 38% or $605 million to $2.22 billion compared to $1.61 billion for 2015, primarily as a
result of:
(cid:127)
(cid:127)
the launch of new programs during or subsequent to 2015, primarily in China; and
acquisitions during or subsequent to 2015, including the partnership agreement in China ("the Xingqiaorui Partnership") with
Chongqing Xingqiaorui and the acquisition of GETRAG, which positively impacted production sales by $302 million.
These factors were partially offset by:
(cid:127)
(cid:127)
a $119 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
net customer price concessions subsequent to 2015.
External Production Sales - Rest of World
External production sales in Rest of World decreased 3% or $15 million to $439 million for 2016 compared to $454 million for 2015,
primarily as a result of:
(cid:127)
(cid:127)
a $67 million decrease in reported U.S. dollar sales as a result of the weakening of foreign currencies against the U.S. dollar,
including the Argentine peso and Brazilian real, each against the U.S. dollar; and
lower production volumes on certain existing programs.
These factors were partially offset by:
(cid:127)
(cid:127)
net customer price increases subsequent to 2015; and
the launch of new programs during or subsequent to 2015, primarily in Brazil.
Complete Vehicle Assembly Sales
Complete Vehicle Assembly Sales
2016
2015
$
2,190
$
2,357
Complete Vehicle Assembly Volumes (Units)
75,049
103,904
Change
-
7%
- 28%
Complete vehicle assembly sales decreased 7% or $167 million to $2.19 billion for 2016 compared to $2.36 billion for 2015 and
assembly volumes decreased 28% or 28,855 units.
The decrease in complete vehicle assembly sales is primarily as a result of:
(cid:127)
(cid:127)
lower assembly volumes on the MINI Countryman and Paceman during 2016 which ended production during the fourth quarter
of 2016; and
the end of production of the Peugeot RCZ at our Magna Steyr facility during the third quarter of 2015.
These factors were partially offset by an increase in assembly volumes for the Mercedes-Benz G-Class which has a higher average
selling price per vehicle compared to the MINI programs.
Tooling, Engineering and Other Sales
Tooling, engineering and other sales increased 14% or $378 million to $3.08 billion for 2016 compared to $2.70 billion for 2015.
In 2016, the major programs for which we recorded tooling, engineering and other sales were the:
Chrysler Pacifica;
Chevrolet Cruze;
Chevrolet Equinox and GMC Terrain;
GMC Acadia, Buick Enclave and Chevrolet Traverse;
BMW 5-Series;
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127) Mercedes-Benz E-Class;
(cid:127)
(cid:127)
(cid:127)
Chevrolet Malibu;
Chevrolet Silverado and GMC Sierra; and
Jeep Renegade.
2016 Annual Report – MD&A
8
In 2015, the major programs for which we recorded tooling, engineering and other sales were the:
Chevrolet Cruze;
GMC Acadia, Buick Enclave and Chevrolet Traverse;
Ford F-Series and F-Series Super Duty;
Audi A4;
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127) MINI Countryman;
Chevrolet Equinox and GMC Terrain;
(cid:127)
Ford Edge;
(cid:127)
Chrysler Pacifica and Dodge Caravan;
(cid:127)
(cid:127)
BMW 2-Series; and
(cid:127) Mercedes-Benz M-Class.
Acquisitions during or subsequent to 2015, including GETRAG, increased our reported tooling, engineering and other sales, while
the weakening of certain foreign currencies against the U.S. dollar, including the Canadian dollar, Chinese renminbi, British pound
and euro had an unfavourable impact of $45 million on our reported tooling, engineering and other sales.
Cost of Goods Sold and Gross Margin
Sales
Cost of goods sold
Material
Direct labour
Overhead
Gross margin
Gross margin as a percentage of sales
2016
2015
$ 36,445
$ 32,134
22,831
2,452
5,840
31,123
5,322
14.6%
$
20,270
2,115
5,174
27,559
4,575
14.2%
$
Cost of goods sold increased $3.56 billion to $31.12 billion for 2016 compared to $27.56 billion for 2015 primarily as a result of:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
acquisitions subsequent to 2015;
higher material, overhead and labour costs associated with the increase in sales;
operational inefficiencies at certain facilities;
higher warranty costs of $75 million;
higher pre-operating costs incurred at new facilities;
higher launch costs;
a higher amount of employee profit sharing;
lower recoveries associated with scrap steel; and
insurance recoveries received during the first quarter of 2015, related to a fire at a body and chassis facility.
These factors were partially offset by:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
a net decrease in reported U.S. dollar cost of goods sold primarily due to the weakening of the Canadian dollar; Chinese
renminbi, British pound and Argentine peso each against the U.S. dollar;
productivity and efficiency improvements at certain facilities;
net divestitures during or subsequent to 2015; and
decreased commodity costs.
Gross margin increased $747 million to $5.32 billion for 2016 compared to $4.58 billion for 2015 and gross margin as a percentage of
sales increased to 14.6% for 2016 compared to 14.2% for 2015. The increase in gross margin as a percentage of sales was primarily
due to:
(cid:127)
(cid:127)
(cid:127)
productivity and efficiency improvements at certain facilities;
a decrease in the proportion of complete vehicle assembly sales relative to total sales, which have a higher material content
than our consolidated average; and
decreased commodity costs.
These factors were partially offset by:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
9
operational inefficiencies at certain facilities, including one body and chassis operation in North America;
higher warranty costs;
the acquisition of GETRAG subsequent to 2015; and
higher pre-operating costs incurred at new facilities.
MAGNA INTERNATIONAL INC.
Depreciation and Amortization
Depreciation and amortization costs increased $254 million to $1.06 billion for 2016 compared to $802 million for 2015. The higher
depreciation and amortization was primarily as a result of:
(cid:127)
(cid:127)
(cid:127)
acquisitions during or subsequent to 2015, including the acquisition of GETRAG; the Xingqiaorui Partnership; and the
acquisition of Stadco Automotive Ltd. ("Stadco");
increased capital deployed at existing facilities; and
increased capital deployed at new facilities.
These factors were partially offset by a decrease in reported U.S. dollar depreciation and amortization as a result of the weakening of
the Canadian dollar, Chinese renminbi, British pound and euro, each against the U.S. dollar.
Selling, General and Administrative ("SG&A")
SG&A expense as a percentage of sales was 4.4% for 2016 compared to 4.5% for 2015. SG&A expense increased $153 million to
$1.60 billion for 2016 compared to $1.45 billion for 2015 primarily as a result of:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
acquisitions during or subsequent to 2015;
higher labour and benefit costs;
increased costs incurred at new facilities;
higher incentive and executive compensation;
higher foreign exchange losses combined with lower foreign exchange gains;
higher costs to support our global compliance programs; and
a higher amount of employee profit sharing.
These factors were partially offset by:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
the weakening of the Canadian dollar, Chinese renminbi, Mexican peso and Argentine peso, each against the U.S. dollar;
an insurance recovery, net of costs incurred, related to a fire in the second quarter of 2016 at a body and chassis facility
in Europe;
a favourable intellectual property infringement settlement in relation to our electronics business;
divestitures during or subsequent to 2015;
lower consulting costs; and
a $5 million net increase in valuation gains in respect of asset-backed commercial paper ("ABCP").
Interest Expense, net
During 2016, we recorded net interest expense of $88 million compared to $44 million for 2015. The $44 million increase is primarily
as a result of:
(cid:127)
(cid:127)
interest expense incurred on the Senior Notes; and
lower interest income earned due to lower average cash balances during 2016 compared to 2015.
Equity Income
Equity income increased $29 million to $233 million for 2016 compared to $204 million for 2015 primarily as a result of the
acquisition of GETRAG in the first quarter of 2016.
2016 Annual Report – MD&A
10
Other Expense (Income), net
During the three months and years ended December 31, 2016 and 2015, we recorded other expense (income), net ("Other Income"
or "Other Expense") items as follows:
2016
Net Income
Operating Attributable
to Magna
Income
Diluted
Earnings
per Share
Operating
Income
2015
Net Income
Attributable
to Magna
Diluted
Earnings
per Share
$
17
13
30
$
17
9
26
$ 0.05
0.02
0.07
$
15
–
15
$
15
–
15
$ 0.03
–
0.03
–
–
–
–
–
–
–
–
–
–
–
–
(136)
12
(124)
(57)
(80)
12
(68)
(42)
(0.19)
0.03
(0.16)
(0.10)
Fourth Quarter
Restructuring(1)
Pension settlement(2)
Third Quarter
Gain on disposal(3)
Restructuring(1)
Second Quarter
Gain on disposal(3)
Full year other expense (income), net
$
30
$
26
$ 0.07
$ (166)
$
(95)
$ (0.23)
(1) Restructuring
[a] For the year ended December 31, 2016
During 2016, we recorded net restructuring charges of $17 million ($17 million after tax) in Germany at a powertrain
systems facility.
[b] For the year ended December 31, 2015
During 2015, we recorded net restructuring charges of $27 million ($27 million after tax) primarily in Germany at our
exterior systems and roof systems operations.
(2) Pension settlement
During the fourth quarter of 2016, we offered a limited lump-sum payout to certain terminated vested plan participants of our
U.S. defined benefit pension plans. As a result of the partial settlement, we recognized a $13 million ($9 million after tax)
non-cash settlement charge.
(3) Gains on disposal
During the third quarter of 2015, we contributed two manufacturing facilities and received a 49% interest in a 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).
During the second quarter of 2015, we sold our battery pack business to Samsung SDI for gross proceeds of $120 million,
resulting in a gain of $57 million ($42 million after tax).
Income from Continuing Operations before Income Taxes
Income from continuing operations before income taxes increased $129 million to $2.78 billion for 2016 compared to $2.65 billion
for 2015. The increase in income from continuing operations before income taxes is the result of:
(cid:127) margins earned on higher production sales;
acquisitions during or subsequent to 2015;
(cid:127)
productivity and efficiency improvements at certain facilities;
(cid:127)
decreased commodity costs;
(cid:127)
an insurance recovery, net of costs incurred, related to a fire in the second quarter of 2016 at a body and chassis facility
(cid:127)
in Europe;
a favourable intellectual property infringement settlement in relation to our electronics business;
divestitures during or subsequent to 2015;
lower consulting costs; and
a $5 million net increase in valuation gains in respect of ABCP.
(cid:127)
(cid:127)
(cid:127)
(cid:127)
11
MAGNA INTERNATIONAL INC.
These factors were partially offset by:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
lower other expense (income), net of $196 million, as discussed above;
operational inefficiencies at certain facilities, including one body and chassis operation in North America;
higher warranty costs of $75 million;
the $44 million increase in interest expense, net, as discussed above;
the negative impact of foreign exchange translation from the weakening of foreign currencies, including the Canadian dollar,
Chinese renminbi, British pound; partially offset by the strengthening of the Mexican peso; Brazilian real and Argentine peso,
each against the U.S. dollar;
higher incentive and executive compensation;
higher pre-operating costs incurred at new facilities;
higher foreign exchange losses combined with lower foreign exchange gains;
higher costs to support our global compliance programs;
higher launch costs;
a higher amount of employee profit sharing; and
lower recoveries associated with scrap steel.
Income Taxes
Income taxes as reported
Tax effect on Other Expense (Income), net
2016
$
$ 706
4
$ 710
%
25.4
(0.1)
25.3
2015
$
$ 711
(71)
$ 640
%
26.8
(1.0)
25.8
Excluding Other Expense (Income), net, after tax, the effective income tax rate decreased to 25.3% for 2016 compared to 25.8% for
2015 primarily as a result of:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
lower non-creditable withholding tax;
a reduction in losses not benefitted in Asia, South America and Europe;
valuation allowance releases in Europe, Asia and North America; and
an increase in equity income.
These factors were partially offset by:
(cid:127)
(cid:127)
a benefit recorded in 2015 on the write-off of historical tax basis in one of our South American subsidiaries; and
a change in our reserves for uncertain tax positions.
(Income) Loss from Continuing Operations Attributable to Non-Controlling Interests
Income from continuing operations attributable to non-controlling interests increased to $43 million for 2016 compared to a loss
from continuing operations attributable to non-controlling interests of $6 million for 2015, primarily due to acquisitions during or
subsequent to 2015, including GETRAG and the Xingqiaorui Partnership.
Net Income Attributable to Magna International Inc.
Net income attributable to Magna International Inc. of $2.03 billion for 2016 increased $18 million compared to $2.01 billion in 2015,
primarily as a result of the increase in net income from continuing operations before income taxes and lower income taxes, partially
offset by a decrease in the income from discontinued operations, net of tax and an increase in the (income) loss from continuing
operations attributable to non-controlling interests, each as discussed above.
2016 Annual Report – MD&A
12
Earnings per Share
Basic earnings per Common Share
Continuing operations
Attributable to Magna International Inc.
Diluted earnings per Common Share
Continuing operations
Attributable to Magna International Inc.
Weighted average number of Common Shares outstanding (millions)
Basic
Diluted
2016
2015
Change
$
$
$
$
5.19
5.19
5.16
5.16
391.0
393.2
$
$
$
$
4.78
4.94
4.72
4.88
407.5
412.7
+
+
+
+
-
-
9%
5%
9%
6%
4%
5%
Diluted earnings per share from continuing operations increased $0.44 to $5.16 compared to $4.72 for 2015. Other Expense
(Income), net, after tax, negatively impacted diluted earnings per share from continuing operations by $0.07 in 2016 and positively
impacted diluted earnings per share from continuing operations by $0.23 in 2015 as discussed in the "Other Expense (Income), net"
section. Excluding these impacts, diluted earnings per share from continuing operations increased $0.74, as a result of the increase
in net income attributable to Magna International Inc. from continuing operations and a decrease in the weighted average number of
diluted shares outstanding during 2016.
The decrease in the weighted average number of diluted shares outstanding was primarily due to the purchase and cancellation of
Common Shares, during or subsequent to 2015, pursuant to our normal course issuer bids.
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.
The following table reconciles net income from continuing operations to Adjusted EBIT:
Net income from continuing operations
Add (deduct):
Interest expense, net
Other expense (income), net
Income taxes
Adjusted EBIT
2016
2015
$ 2,074
$ 1,940
88
30
706
$ 2,898
44
(166)
711
$ 2,529
North America
Europe
Asia
Rest of World
Corporate and Other
Total reportable segments
2016
$ 20,744
13,080
2,674
465
(518)
$ 36,445
Total Sales
2015
$ 19,015
11,123
1,981
461
(446)
$ 32,134
Change
2016
2015
Change
Adjusted EBIT
$ 1,729
1,957
693
4
(72)
$ 4,311
$ 2,061
543
266
(17)
45
$ 2,898
$ 1,934
451
149
(25)
20
$ 2,529
$
$
127
92
117
8
25
369
13
MAGNA INTERNATIONAL INC.
North America
Adjusted EBIT in North America increased $127 million to $2.06 billion for 2016 compared to $1.93 billion for 2015 primarily as a
result of:
(cid:127) margins earned on higher production sales;
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
the acquisition of GETRAG during the first quarter of 2016;
productivity and efficiency improvements at certain facilities;
decreased commodity costs;
a favourable intellectual property infringement settlement in relation to our electronics business; and
lower launch costs.
These factors were partially offset by:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
operational inefficiencies at certain facilities, including one body and chassis operation;
higher warranty costs of $33 million;
a decrease in reported U.S. dollar Adjusted EBIT due to the weakening of the Canadian dollar against the U.S. dollar;
lower equity income;
higher affiliation fees paid to Corporate;
higher incentive compensation;
lower recoveries associated with scrap steel;
higher pre-operating costs incurred at new facilities;
insurance recoveries received during the first quarter of 2015, related to a fire at a body and chassis facility; and
net customer price concessions subsequent to 2015.
Europe
Adjusted EBIT in Europe increased $92 million to $543 million for 2016 compared to $451 million for 2015 primarily as a result of:
(cid:127) margins earned on higher production sales;
acquisitions during or subsequent to 2015;
(cid:127)
productivity and efficiency improvements at certain facilities;
(cid:127)
an insurance recovery, net of costs incurred, related to a fire in the second quarter of 2016 at a body and chassis facility in
(cid:127)
Europe; and
decreased commodity costs.
(cid:127)
These factors were partially offset by:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
operational inefficiencies at certain facilities;
higher warranty costs of $34 million;
higher launch costs;
a decrease in reported U.S. dollar Adjusted EBIT due to the weakening of the British pound, Turkish lira and Russian ruble, each
against the U.S. dollar;
higher affiliation fees paid to Corporate;
higher pre-operating costs incurred at new facilities;
a higher amount of employee profit sharing;
higher incentive compensation; and
net customer price concessions subsequent to 2015.
Asia
Adjusted EBIT in Asia increased $117 million to $266 million for 2016 compared to $149 million for 2015 primarily as a result of:
(cid:127) margins earned on higher production sales;
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
acquisitions during or subsequent to 2015, including the Xingqiaorui Partnership and GETRAG;
productivity and efficiency improvements at certain facilities;
decreased commodity costs;
lower launch costs; and
higher equity income.
These factors were partially offset by:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
a decrease in reported U.S. dollar Adjusted EBIT due to the weakening of the Chinese renminbi against the U.S. dollar;
operational inefficiencies at certain facilities;
higher pre-operating costs incurred at new facilities;
higher warranty costs of $8 million; and
a higher amount of employee profit sharing.
2016 Annual Report – MD&A
14
Rest of World
Adjusted EBIT in Rest of World improved $8 million to a loss of $17 million for 2016 compared to a loss of $25 million for 2015
primarily as a result of:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
net customer price increases subsequent to 2015;
an increase in reported U.S. dollar Adjusted EBIT due to the strengthening of the Brazilian real and Argentine peso, each,
against the U.S. dollar;
productivity and efficiency improvements at certain facilities;
higher equity income; and
lower pre-operating costs incurred at new facilities.
These factors were partially offset by:
(cid:127)
(cid:127)
decreased margins earned on lower production sales;
higher incentive compensation.
Corporate and Other
Adjusted EBIT in Corporate and Other increased $25 million to $45 million for 2016 compared to $20 million for 2015 primarily as a
result of:
(cid:127)
(cid:127)
(cid:127)
an increase in affiliation fees earned from our divisions;
lower consulting costs; and
a $5 million net increase in valuation gains in respect of ABCP.
These factors were partially offset by:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
higher costs to support our global compliance programs;
higher incentive compensation;
higher net foreign exchange losses; and
higher labour costs.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flow from Operations
Net income from continuing operations
Items not involving current cash flows
Changes in operating assets and liabilities
Cash provided from operating activities
2016
$ 2,074
1,231
3,305
81
$ 3,386
2015
Change
$ 1,940
736
2,676
(344)
$ 2,332
$
629
$ 1,054
Cash provided from operating activities before changes in operating assets and liabilities increased $629 million for 2016 compared
to 2015 primarily as a result of:
(cid:127)
(cid:127)
(cid:127)
an increase in cash received from customers of $4.28 billion as a result of higher total sales as discussed above;
a decrease in current income taxes of $32 million; and
higher dividends received from equity investments of $40 million.
These factors were partially offset by:
(cid:127)
(cid:127)
(cid:127)
higher cash paid for material, labour and overhead of $2.54 billion, $695 million and $401 million, respectively, each primarily
associated with the increase in sales and other factors discussed in the Cost of Goods Sold and Gross Margin section above;
higher SG&A expense of $54 million as discussed in the Selling, General and Administrative section above; and
higher net interest expense of $42 million as discussed in the Interest Expense, net section above.
Changes in operating assets and liabilities increased $425 million for 2016 compared to 2015 primarily due to the increase in
accounts payable due to increased sales and timing of payments.
15
MAGNA INTERNATIONAL INC.
Capital and Investment Spending
Fixed asset additions
Investments and other assets
Fixed assets, investments and other assets additions
Purchase of subsidiaries
Restricted cash deposits
Proceeds from disposition
Sale of Interiors
Proceeds on disposal of facilities
Cash used in discontinued operations
Cash used for investment activities
Fixed assets, investments and other assets additions
2016
2015
Change
$ (1,807)
(478)
(2,285)
(1,930)
(194)
138
–
–
–
$ (4,271)
$ (1,591)
(221)
(1,812)
(222)
–
61
520
221
(56)
$ (1,288)
$ (2,983)
In 2016, we invested $1.81 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 2016 was for manufacturing
equipment for programs that will be launching subsequent to 2016.
We provided a $92 million loan to one of our equity-accounted joint ventures, we invested $357 million in other assets related
primarily to fully reimbursable tooling, planning, and engineering costs for programs that launched during 2016 or will be launching
subsequent to 2016 and we invested $29 million in equity-accounted investments.
Restricted cash deposits
In 2016, we had $194 million invested in short-term restricted cash deposits. These deposits secure $185 million drawn on a euro
credit facility with a bank that includes a netting arrangement that provides for the legal right of set-off.
Proceeds from disposition
In 2016, the $138 million of proceeds include normal course fixed and other asset disposals.
Sale of Interiors
On August 31, 2015 we sold substantially all of our interiors operations (excluding our seating operations) and received $520 million
of proceeds, net of transaction costs.
Proceeds on disposal of facilities
During 2015, we received $221 million of proceeds on disposal of facilities related to the:
(cid:127)
(cid:127)
sale of our battery pack business to Samsung SDI; and
formation of a joint venture for the manufacture and sale of roof and other accessories for the Jeep market to original
equipment manufacturers as well as aftermarket customers.
Financing
Issues of debt
Increase in short-term borrowings
Repayments of debt
Issue of Common Shares on exercise of stock options
Repurchase of Common Shares
Contributions to subsidiaries by non-controlling interests
Dividends paid to non-controlling interests
Dividends paid
Cash (used for) provided from financing activities
2016
2015
Change
$
282
386
(417)
33
(913)
(1)
(5)
(385)
$ (1,020)
$ 1,608
25
(99)
35
(515)
41
–
(354)
741
$
$ (1,761)
Issues of debt relates primarily to the issue of Senior Notes during 2015. Senior Notes are senior unsecured obligations and do not
include any financial covenants. We may redeem the Senior Notes in whole or in part at any time, at specified redemption prices
determined in accordance with the terms of each of the respective indentures governing the Senior Notes. The funds raised through
these offerings were used for general corporate purposes, including capital expenditures, as well as the acquisition of GETRAG.
2016 Annual Report – MD&A
16
During 2016 we issued $295 million of U.S. commercial paper [the "U.S. Program"] and we borrowed $185 million against a euro
credit facility. These increases were offset by a reduction in our bank indebtedness.
A portion of the proceeds from the issue of the U.S. Program were used to repay $169 million on our global credit facility. We also
repaid bank debt within our Asia segment that is included in debt repayments.
Repurchases of Common Shares during 2016 includes 22.6 million Common Shares repurchased for aggregate cash consideration
of $913 million.
Cash dividends paid per Common Share were $1.00 for 2016, for a total of $385 million.
Financing Resources
Liabilities
Short-term borrowings
Long-term debt due within one year
Long-term debt
Non-controlling interests
Shareholders' equity
Total capitalization
As at
December 31,
2016
As at
December 31,
2015
Change
$
623
139
2,394
3,156
451
9,768
$ 13,375
$
25
211
2,327
2,563
151
8,966
$ 11,680
$
1,695
Total capitalization increased by $1.70 billion to $13.38 billion as at December 31, 2016 compared to $11.68 billion at December 31,
2015, primarily as a result of a $802 million increase in shareholders' equity, a $593 million increase in liabilities and a $300 million
increase in non-controlling interest.
The increase in liabilities relates primarily to:
(cid:127)
(cid:127)
(cid:127)
the issuance of $295 million of U.S. commercial paper [the "U.S. Program"] during 2016 and the issuance of $320 million of
euro-commercial paper [the "euro-Program"] during 2016. These programs allow us to minimize the amount of cash on hand to
run our business by providing funding on a more flexible and cost effective basis compared to drawing on our revolving credit
facility;
higher short-term borrowings are primarily as a result of an increase in non-cash working capital and cash deployed for the
repurchase and cancellation of Common Shares under our normal course issuer bid during 2016; and
higher long-term debt primarily as a result of the acquisition of GETRAG in the first quarter of 2016.
The increase in shareholders' equity was primarily as a result of the $2.07 billion of net income earned in 2016, partially offset by the
$913 million repurchase and cancellation of 22.6 million Common Shares during 2016 and $385 million of dividends paid
during 2016.
The increase in non-controlling interest was primarily as a result of acquisitions during or subsequent to 2015.
Cash Resources
During 2016, our cash resources decreased by $1.89 billion to $974 million as a result of the cash used for investing and financing
activities, partially offset by cash provided from operating activities, as discussed above. In addition to our cash resources at
December 31, 2016, we had term and operating lines of credit totalling $2.91 billion of which $2.10 billion was unused and available.
The Company maintains a revolving credit facility of $2.75 billion with a maturity date of June 22, 2021. The facility includes a
$200 million Asian tranche, a $100 million Mexican tranche and a tranche for Canada, U.S. and Europe, which is fully transferable
between jurisdictions and can be drawn in U.S. dollars, Canadian dollars or euros.
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 March 9,
2017 were exercised:
Common Shares
Stock options(i)
382,269,005
9,258,413
391,527,418
(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.
17
MAGNA INTERNATIONAL INC.
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, 2016, we had contractual obligations requiring annual payments as follows:
Operating leases
Long-term debt
Unconditional purchase obligations:
Materials and services
Capital
Total contractual obligations
2017
$
277
139
2,758
1,096
$ 4,270
2018-
2019
$
445
65
419
191
$ 1,120
2020-
2021
347
42
162
51
602
$
$
Thereafter
Total
$
568
2,287
5
14
$ 2,892
$ 1,655
2,533
3,344
1,352
$ 8,884
Our unfunded obligations with respect to employee future benefit plans, which have been actuarially determined, were $652 million
at December 31, 2016. These obligations are as follows:
Projected benefit obligation
Less plan assets
Unfunded amount
Pension
Liability
$
$
624
(330)
294
Retirement
Liability
Termination and
Long Service
Arrangements
$
$
31
–
31
$
$
327
–
327
Total
982
(330)
652
$
$
Our off-balance sheet financing arrangements are limited to operating lease contracts.
We have facilities that are subject to operating leases. Operating lease payments in 2016 for facilities were $252 million. Operating
lease commitments in 2017 for facilities are expected to be $228 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 $63 million for 2016, and are expected to be $49 million in 2017.
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).
2016 Annual Report – MD&A
18
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
Our significant accounting policies are more fully described in Note 1, "Significant Accounting Policies," to the consolidated financial
statements included in this Report. The preparation of the audited consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure
of contingent assets and liabilities, as of the date of the consolidated financial statements. These estimates and assumptions are
based on our historical experience, and various other assumptions we believe to be reasonable in the circumstances. Since these
estimates and assumptions are subject to an inherent degree of uncertainty, actual results in these areas may differ significantly
from our estimates.
We believe the following critical accounting policies and estimates affect the more subjective or complex judgments and estimates
used in the preparation of our consolidated financial statements and accompanying notes. Management has discussed the
development and selection of the following critical accounting policies with the Audit Committee of the Board of Directors, and the
Audit Committee has reviewed our disclosure relating to critical accounting policies in this MD&A.
Acquisitions
We allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The
excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. We use all
available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of
identifiable intangible assets and any other significant assets or liabilities. We adjust the preliminary purchase price allocation, as
necessary, up to one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities
assumed.
Our purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to
apply judgment to estimate the fair value of acquired assets and assumed liabilities. Management estimates the fair value of assets
and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques,
including discounted cash flows and market multiple analyses. Unanticipated events or circumstances may occur which could affect
the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.
Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and
actual results could vary.
Impairment of Goodwill and Other Long-lived Assets
We review goodwill at the reporting unit level for impairment annually or more frequently if events or changes in circumstances
indicate that goodwill might be impaired. We perform a two-step goodwill impairment test in conjunction with our annual business
plan during the fourth quarter of each year. In step one, the fair value of a reporting unit is compared to its carrying value. If the fair
value is greater than its carrying amount, goodwill is not considered to be impaired and the second step is not required. However, if
the fair value of the reporting unit is less than its carrying amount, the second step must be performed to measure the amount of the
impairment loss, if any. The second step requires a reporting unit to compare its implied fair value of goodwill to its carrying amount.
If the carrying amount of goodwill exceeds its implied fair value, the reporting unit would recognize an impairment loss for that
excess. In January 2017, the FASB issued guidance which will eliminate the second step requiring an impairment charge to be
recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. Refer to Note 2. Accounting
Standards to the audited consolidated financial statements included in this report for additional details on the effective date
and adoption.
In addition to our review of goodwill, we evaluate fixed assets and other long-lived assets for impairment whenever indicators of
impairment exist. Indicators of impairment include the bankruptcy of a significant customer or the early termination, loss,
renegotiation of the terms of, or delay in the implementation of, any significant production contract. If the sum of the future cash
flows expected to result from the asset, undiscounted and without interest charges, is less than the reported value of the asset, an
asset impairment would be recognized in the consolidated financial statements. The amount of impairment to be recognized is
calculated by subtracting the fair value of the asset from the reported value of the asset.
We believe that accounting estimates related to goodwill and long-lived asset impairment assessments are "critical accounting
estimates" because: (i) they are subject to significant measurement uncertainty and are susceptible to change as management is
required to make forward-looking assumptions regarding the impact of improvement plans on current operations, in-sourcing and
other new business opportunities, program pricing and cost assumptions on current and future business, the timing of new
program launches and future forecasted production volumes; and (ii) any resulting impairment loss could have a material impact on
our consolidated net income and on the amount of assets reported in our consolidated balance sheet.
Revenue Recognition - Tooling and Engineering Service Contracts
With respect to our contracts with OEMs for particular vehicle programs, we perform multiple revenue-generating activities. The
most common arrangement is where, in addition to contracting for the production and sale of parts, we also have a contract with the
OEM for engineering services, related tooling, and in some cases subsequent assembly activities. Under these arrangements, we
either construct the tools at our in-house tool shops or contract with third party tooling vendors to construct and supply tooling to be
used by us in the production of parts for the OEM. On completion of the tooling build, and upon acceptance of the tooling by the
OEM, we sell the tooling to the OEM pursuant to a separate tooling purchase order.
19
MAGNA INTERNATIONAL INC.
Revenues from significant engineering services and tooling contracts that qualify as separate revenue elements are recognized on a
percentage of completion basis. The percentage of completion method recognizes revenue and cost of sales over the term of the
contract based on estimates of the state of completion, total contract revenue and total contract costs. Contract costs are estimated
at the time of signing the contract and are reviewed at each reporting date. Adjustments to the original estimates of total contract
costs are often required as work progresses under the contract and as experience is gained, even though the scope of the work
under the contract may not change.
Tooling and engineering contract prices are generally fixed; however, price changes, change orders and program cancellations may
affect the ultimate amount of revenue recorded with respect to a contract. When the current estimates of total contract revenue
and total contract costs indicate a loss, a provision for the entire loss on the contract is made. Factors that are considered in arriving
at the forecasted loss on a contract include, amongst others, cost over-runs, non-reimbursable costs, change orders and potential
price changes.
Revenues and cost of sales from tooling and engineering services contracts are presented on a gross basis in the consolidated
statements of income when we are acting as principal and are subject to significant risks and rewards of the business. Otherwise,
components of revenue and related costs are presented on a net basis. To date, substantially all engineering services and tooling
contracts have been recorded on a gross basis.
Warranty
We record product warranty liabilities based on individual customer agreements. Under most customer agreements, we only
account for existing or probable claims on product default issues when amounts related to such issues are probable and reasonably
estimable. 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 customers' warranty experience.
Product liability provisions are established based on our best estimate of the amounts necessary to settle existing claims on product
default 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. Costs typically include
the cost of the product being replaced, the customer's cost of the recall and labour to remove and replace the defective part. When
a decision to recall a product has been made or is probable, our estimated cost of the recall is recorded as a charge to income in that
period. In making this estimate, judgment is required as to the number of units that may be returned as a result of the recall, the total
cost of the recall campaign, the ultimate negotiated sharing of the cost between us, the customer and, in some cases a supplier.
We monitor our warranty activity on an ongoing basis and adjust our reserve estimates when it is probable that future warranty
costs will be different than those estimates.
Income Taxes
We are subject to income taxes in Canada and other non-Canadian jurisdictions. Significant judgement and estimates are required in
determining our provision for income taxes, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits.
The determination of our tax liabilities involves dealing with uncertainties in the application of complex tax laws. We recognize tax
benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such
positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement.
At December 31, 2016, we had gross unrecognized tax benefits of $220 million excluding interest and penalties, of which
$201 million, if recognized, would affect our effective tax rate. The gross unrecognized tax benefits differ from the amount that
would affect our effective tax rate due primarily to the impact of the valuation allowance on deferred tax assets.
Deferred tax assets and liabilities are recognized for the estimated future tax effects attributable to temporary differences between
financial statement carrying value of existing assets and liabilities and their respective tax bases and tax loss and credit
carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Accounting standards require that we assess whether valuation allowances should be established or maintained against our
deferred income tax assets, based on consideration of all available evidence, using a "more-likely-than-not" standard. The factors
used to assess the likelihood of realization are: history of losses, forecasts of future pre-tax income and tax planning strategies that
could be implemented to realize the deferred tax assets. On a quarterly basis, we evaluate the realizability of deferred tax assets by
assessing our valuation allowances and by adjusting the amount of such allowances as necessary. We use tax planning strategies to
realize deferred tax assets to avoid the potential loss of benefits.
2016 Annual Report – MD&A
20
At December 31, 2016, we had recorded deferred tax assets (net of related valuation allowances) in respect of loss carryforwards
and other deductible temporary differences of $100 million and $253 million, respectively. The deferred tax assets in respect of loss
carryforwards relate primarily to operations in Germany, the United Kingdom, Canada, Mexico and Italy. We had domestic and
foreign operating loss carryforwards of $2.29 billion and tax credit carryforwards of $22 million, which relate primarily to operations
in Germany, Austria, the United States, Brazil, the United Kingdom, Spain and China. Approximately $1.65 billion of the operating
losses can be carried forward indefinitely. The remaining operating losses and tax credit carryforwards expire between 2017
and 2036.
Employee Future Benefit Plans
The determination of the obligation and expense for defined benefit pension, termination and long service arrangements and other
post-retirement benefits, such as retiree healthcare and medical benefits, is dependent on the selection of certain assumptions
used by actuaries in calculating such amounts. Those assumptions include, among others, the discount rate, expected long-term
rate of return on plan assets and rates of increase in compensation costs. Actual results that differ from the assumptions used are
accumulated and amortized over future periods and therefore impact the recognized expense in future periods. Significant changes
in assumptions or significant plan amendments could materially affect our future employee benefit obligations and future expense.
At December 31, 2016, we had past service costs and actuarial experience losses of $215 million included in accumulated other
comprehensive income that will be amortized to future employee benefit expense over the expected average remaining service life
of employees or over the expected average life expectancy of retired employees, depending on the status of the plan.
FUTURE CHANGES IN ACCOUNTING POLICIES
Refer to Note 2. Accounting Standards to the audited consolidated financial statements included in this report for the impact of
recently issued accounting pronouncements.
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 16 of our unaudited interim consolidated financial statements for the three months and year ended December 31,
2016, 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, 2015.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") are designed to ensure that material information required to be disclosed in reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such information is
accumulated and communicated to senior management, including the Company's Chief Executive Officer and Chief Financial
Officer, as appropriate, to enable them to make timely decisions regarding required disclosure of such information. We have
conducted an evaluation of our disclosure controls and procedures as of December 31, 2016 under the supervision, and with the
participation of, our Chief Executive Officer and our Chief Financial Officer. Based on this evaluation, our Chief Executive Officer and
our Chief Financial Officer have concluded that our disclosure controls and procedures (as this term is defined in the rules adopted
by Canadian securities regulatory authorities and the United States Securities and Exchange Commission ("SEC")) are effective as of
December 31, 2016.
21
MAGNA INTERNATIONAL INC.
Management's Annual Report on Internal Control over Financial Reporting
Internal control over financial reporting is a process designed to provide reasonable, but not absolute, assurance regarding the
reliability of financial reporting and preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States. Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Due to its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements on a timely basis. Additionally, projections of any evaluation of the effectiveness of internal control over
financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management used the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control-Integrated Framework (2013) to
evaluate the effectiveness of internal control over financial reporting. On January 4, 2016, we completed the acquisition of GETRAG.
As permitted by securities rules and regulations, we have excluded GETRAG from our evaluation of internal control over financial
reporting as of December 31, 2016. The excluded GETRAG assets constituted 7% of our total assets as of December 31, 2016.
Overall, GETRAG constituted 6% of our sales and 2% of our net income for the year ended December 31, 2016. Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer have assessed the effectiveness of our internal control over
financial reporting and concluded that, as at December 31, 2016, such internal control over financial reporting is effective. The
Company's internal control over financial reporting as of December 31, 2016 has been audited by Deloitte LLP, Independent
Registered Public Accounting Firm who also audited the Company's consolidated financial statements for the year ended
December 31, 2016. Deloitte LLP expressed an unqualified opinion on the effectiveness of the Company's internal control over
financial reporting. This report precedes our audited consolidated financial statements for the year ended December 31, 2016.
Changes in Internal Controls over Financial Reporting
Other than the addition of GETRAG's operations to our internal control over financial reporting, there have been no changes in our
internal controls over financial reporting that occurred during 2016 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. The Company is currently integrating GETRAG into its operations, compliance
programs and internal control process. As permitted by the securities rules and regulations, the Company has excluded GETRAG
from management's evaluation of internal control over financial reporting as of December 31, 2016.
RESULTS OF OPERATIONS – FOR THE THREE MONTHS ENDED DECEMBER 31, 2016
The discussion of our results of operations for the three months ended December 31, 2016 contained in the MD&A attached to our
press release dated February 24, 2017, as filed via the Canadian Securities Administrators' System for Electronic Document
Analysis and Retrieval (SEDAR) (www.sedar.com), is incorporated by reference herein.
2016 Annual Report – MD&A
22
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data has been prepared in accordance with U.S. GAAP.
Sales
Net income
Basic earnings per Common Share
Continuing operations
Attributable to Magna International Inc.
Diluted earnings per Common Share
Continuing operations
Attributable to Magna International Inc.
Sales
Net income
Basic earnings per Common Share (restated)
Continuing operations
Attributable to Magna International Inc.
Diluted earnings per Common Share (restated)
Continuing operations
Attributable to Magna International Inc.
Mar 31,
2016
$ 8,900
$
$
$
$
$
503
1.23
1.23
1.22
1.22
Mar 31,
2015
$ 7,772
$
$
$
$
$
464
1.11
1.14
1.10
1.12
For the three month periods ended
Jun 30,
2016
$ 9,443
$
$
$
$
$
561
1.42
1.42
1.41
1.41
Sep 30,
2016
$ 8,849
$
$
$
$
$
514
1.30
1.30
1.29
1.29
For the three month periods ended
Jun 30,
2015
$ 8,133
$
$
$
$
$
480
1.31
1.18
1.29
1.16
Sep 30,
2015
$ 7,661
$
$
$
$
$
588
1.15
1.44
1.13
1.42
Dec 31,
2016
$ 9,253
$
$
$
$
$
496
1.25
1.25
1.24
1.24
Dec 31,
2015
$ 8,568
$
$
$
$
$
475
1.20
1.18
1.19
1.17
The third quarter of the year is generally affected by the normal seasonal effects of lower vehicle production volumes as a result of
OEM summer shutdowns.
Included in the quarterly net income attributable to Magna International Inc. are the following Other Expense (Income), net items
that have been discussed above:
Restructuring
Pension settlement
Restructuring
Gain on disposal
Mar 31,
2016
$
$
–
–
–
Mar 31,
2015
$
$
–
–
–
For the three month periods ended
Jun 30,
2016
$
$
–
–
–
Sep 30,
2016
$
$
–
–
–
For the three month periods ended
Jun 30,
2015
$
$
–
(57)
(57)
Sep 30,
2015
$
$
12
(136)
(124)
Dec 31,
2016
$
$
17
13
30
Dec 31,
2015
$
$
–
15
For more information regarding our quarter over quarter results, please refer to our first, second and third quarter 2016 quarterly
reports which 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.
23
MAGNA INTERNATIONAL INC.
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 the expected growth of the Dual
Clutch Transmission (DCT) product segment. The forward-looking statements or 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 or forward-looking information 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 or forward-looking information. Any such
forward-looking statements or forward-looking information 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; a decline in consumer
confidence, which would typically result in lower production volume levels; the growth of protectionism and the implementation of
measures that impede the free movement of goods, services, people and capital; planning risks created by rapidly changing
economic or political conditions; fluctuations in relative currency values; legal claims and/or regulatory actions against us, including
without limitation any proceedings that may arise out of our global review focused on anti-trust risk; our ability to successfully launch
material new or takeover business; underperformance of one or more of our operating divisions; ongoing pricing pressures,
including our ability to offset price concessions demanded by our customers; warranty and recall costs; our ability to successfully
identify, complete and integrate acquisitions or achieve anticipated synergies; our ability to conduct appropriate due diligence on
acquisition targets; an increase in our risk profile as a result of completed acquisitions; 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; inability to sustain or grow our business; risks of conducting business in foreign markets, including China, India, Eastern
Europe, Brazil and other non-traditional markets for us; our ability to successfully compete with other automotive suppliers,
including disruptive technology innovators which are entering or expanding in the automotive industry; our ability to consistently
develop innovative products or processes; our changing risk profile due to the increasing importance to us of product areas such as
powertrain and electronics; restructuring, downsizing and/or other significant non-recurring costs; a reduction in outsourcing by our
customers or the loss of a material production or assembly program; a prolonged disruption in the supply of components to us from
our suppliers; shutdown of our or our customers' or sub-suppliers' production facilities due to a labour disruption; scheduled
shutdowns of our customers' production facilities (typically in the third and fourth quarters of each calendar year); the termination or
non-renewal by our customers of any material production purchase order; exposure to, and ability to offset, commodities price
increases; restructuring actions by OEMs, including plant closures; work stoppages and labour relations disputes; risk of production
disruptions due to natural disasters or catastrophic event; the security and reliability of our information technology systems; pension
liabilities; 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; impairment charges related to goodwill, long-lived assets and deferred tax assets; other potential
tax exposures; changes in credit ratings assigned to us; changes in laws and governmental regulations, including tax and transfer
pricing laws; costs associated with compliance with environmental laws and regulations; liquidity risks; 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; 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 or forward-looking information, we caution readers not to place undue reliance on any forward-looking
statements or forward-looking information, 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 or forward-looking information.
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 or forward-looking information to reflect subsequent information, events, results or circumstances
or otherwise.
2016 Annual Report – MD&A
24
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Magna International Inc.
We have audited the accompanying consolidated balance sheets of Magna International Inc. and subsidiaries (the "Company") as of
December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in equity and
cash flows for the years ended December 31, 2016 and 2015. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Magna
International Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the
years ended December 31, 2016 and 2015, in conformity with accounting principles generally accepted in the United States
of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of December 31, 2016 based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 9, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.
15MAR201710104058
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
March 9, 2017
25
MAGNA INTERNATIONAL INC.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Magna International Inc.
We have audited the internal control over financial reporting of Magna International Inc. and subsidiaries (the "Company") as of
December 31, 2016, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. As described in Management's Annual Report on Internal Control over
Financial Reporting, management excluded from its assessment the internal control over financial reporting the GETRAG Group of
Companies ("GETRAG"), which was acquired on January 4, 2016. The excluded GETRAG financial statement amounts constitute
7% of total assets, 6% of sales and 2% of net income of the consolidated financial statement amounts as of and for the year ended
December 31, 2016. Accordingly, our audit did not include the internal control over financial reporting at GETRAG. The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
consolidated financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended December 31, 2016 of the Company and our report dated March 9,
2017 expressed an unqualified opinion on those financial statements.
15MAR201710104058
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
March 9, 2017
2016 Annual Report – Financial Statements
26
MAGNA INTERNATIONAL INC.
Consolidated Statements of Income
[U.S. dollars in millions, except per share figures]
Years ended December 31,
Sales
Costs and expenses
Cost of goods sold
Depreciation and amortization
Selling, general and administrative
Interest expense, net
Equity income
Other expense (income), net
Income from continuing operations before income taxes
Income taxes
Net income from continuing operations
Income from discontinued operations, net of tax
Net income
(Income) loss from continuing operations attributable to non-controlling
interests
Net income attributable to Magna International Inc.
Basic Earnings per Common Share:
Continuing operations
Discontinued operations
Attributable to Magna International Inc.
Diluted Earnings per Common Share:
Continuing operations
Discontinued operations
Attributable to Magna International Inc.
Weighted average number of Common Shares outstanding during the
year [in millions]:
Basic
Diluted
See accompanying notes
Note
2016
2015
$ 36,445
$ 32,134
17
4
12
5
5
5
31,123
1,056
1,601
88
(233)
30
2,780
706
2,074
–
2,074
27,559
802
1,448
44
(204)
(166)
2,651
711
1,940
67
2,007
(43)
$ 2,031
6
$ 2,013
$
$
$
$
5.19
–
5.19
5.16
–
5.16
$
$
$
$
4.78
0.16
4.94
4.72
0.16
4.88
391.0
393.2
407.5
412.7
27
MAGNA INTERNATIONAL INC.
MAGNA INTERNATIONAL INC.
Consolidated Statements of Comprehensive Income
[U.S. dollars in millions]
Years ended December 31,
Net income
Note
2016
2015
$ 2,074
$ 2,007
Other comprehensive loss, net of tax:
21
Net unrealized loss on translation of net investment in foreign operations
Net unrealized gain (loss) on cash flow hedges
Reclassification of net loss on cash flow hedges to net income
Reclassification of net loss on investments to net income
Reclassification of net loss on pensions to net income
Pension and post-retirement benefits
Other comprehensive loss
Comprehensive income
Comprehensive (income) loss attributable to non-controlling interests
Comprehensive income attributable to Magna International Inc.
See accompanying notes
(134)
1
126
1
9
(29)
(26)
(800)
(244)
95
3
7
14
(925)
2,048
(18)
$ 2,030
1,082
8
$ 1,090
2016 Annual Report – Financial Statements
28
MAGNA INTERNATIONAL INC.
Consolidated Balance Sheets
[U.S. dollars in millions, except per share figures]
As at December 31,
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable
Inventories
Prepaid expenses and other
Investments
Fixed assets, net
Intangible assets, net
Goodwill
Deferred tax assets
Other assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings
Accounts payable
Accrued salaries and wages
Other accrued liabilities
Income taxes payable
Long-term debt due within one year
Long-term debt
Long-term employee benefit liabilities
Other long-term liabilities
Deferred tax liabilities
Shareholders' equity
Common Shares [issued: 382,252,522; 2015 – 402,264,201]
Contributed surplus
Retained earnings
Accumulated other comprehensive loss
Non-controlling interests
Commitments and contingencies [notes 17, 22 and 23]
See accompanying notes
On behalf of the Board:
Note
2016
2015
6
8
9, 18, 22
10
13
7, 11
12
14, 18
17
15
16
17
17
18
19
12
20
20
21
$
974
6,165
2,804
220
10,163
1,850
7,022
621
1,923
268
719
$ 22,566
$
623
5,430
768
1,639
96
139
8,695
2,394
667
298
293
12,347
3,796
105
7,318
(1,451)
9,768
451
10,219
$ 22,566
$ 2,863
5,439
2,564
278
11,144
399
5,948
169
1,344
271
412
$ 19,687
$
25
4,746
660
1,512
122
211
7,276
2,327
504
331
132
10,570
3,942
107
6,387
(1,470)
8,966
151
9,117
$ 19,687
15MAR201710082159
Lawrence D. Worrall
Director
15MAR201710081912
William L. Young
Chairman of the Board
29
MAGNA INTERNATIONAL INC.
MAGNA INTERNATIONAL INC.
Consolidated Statements of Cash Flows
[U.S. dollars in millions]
Years ended December 31,
OPERATING ACTIVITIES
Net income from continuing operations
Items not involving current cash flows
Changes in operating assets and liabilities
Cash provided from operating activities
INVESTMENT ACTIVITIES
Fixed asset additions
Purchase of subsidiaries
Increase in investments and other assets
Increase in restricted cash deposits
Proceeds from disposition
Proceeds on disposal of facilities
Sale of Interiors
Cash used in discontinued operations
Cash used for investment activities
FINANCING ACTIVITIES
Issues of debt
Increase in short-term borrowings
Repayments of debt
Issues of Common Shares on exercise of stock options
Repurchase of Common Shares
Contributions to subsidiaries by non-controlling interests
Dividends paid to non-controlling interests
Dividends paid
Cash (used for) provided from financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See accompanying notes
Note
2016
2015
6
6
7
4
17
17
20
$ 2,074
1,231
3,305
81
3,386
$ 1,940
736
2,676
(344)
2,332
(1,807)
(1,930)
(478)
(194)
138
–
–
–
(4,271)
282
386
(417)
33
(913)
(1)
(5)
(385)
(1,020)
16
(1,591)
(222)
(221)
–
61
221
520
(56)
(1,288)
1,608
25
(99)
35
(515)
41
–
(354)
741
(171)
(1,889)
2,863
974
$
1,614
1,249
$ 2,863
2016 Annual Report – Financial Statements
30
MAGNA INTERNATIONAL INC.
Consolidated Statements of Changes in Equity
[U.S. dollars in millions, except number of common shares]
Common Shares
Stated
Value
Number
Contri-
buted Retained
Surplus Earnings
Non-
controlling
Interests
Total
Equity
AOCL[i]
[in millions]
Balance, December 31, 2014
410.3 $ 3,979
$
83
$ 5,155
$
(558)
$
14 $
8,673
Net income
Other comprehensive loss
Shares issued on exercise of stock options
Release of stock and stock units
Repurchase and cancellation under
2.4
0.5
45
17
normal course issuer bids [note 20]
(11.1)
(108)
Contribution by non-controlling interests [note 7]
Purchase of non-controlling interests [note 7]
Acquisitions [note 7]
Stock-based compensation expense
Dividends paid [$0.88 per share]
Balance, December 31, 2015
Net income
Other comprehensive loss
Shares issued on exercise of stock options
Release of stock and stock units
Repurchase and cancellation under
0.2
402.3
9
3,942
2.1
0.4
47
25
2,013
(923)
(418)
11
(363)
6,387
2,031
(1,470)
(1)
(10)
(17)
17
(2)
36
107
(14)
(25)
(6)
(2)
29
116
151
43
(25)
2,007
(925)
35
–
(515)
46
(2)
116
36
(354)
9,117
2,074
(26)
33
–
normal course issuer bids [note 20]
(22.6)
(222)
(711)
20
Contribution by non-controlling interests [note 7]
Acquisitions [note 7]
Stock-based compensation expense
Dividends paid to non-controlling interests
Dividends paid [$1.00 per share]
Balance, December 31, 2016
37
0.1
4
382.3 $ 3,796
$ 105
(389)
$ 7,318
$ (1,451)
[i] AOCL is Accumulated Other Comprehensive Loss.
See accompanying notes
(1)
288
(913)
(1)
288
37
(5)
(385)
$ 451 $ 10,219
(5)
31
MAGNA INTERNATIONAL INC.
MAGNA INTERNATIONAL INC.
Notes to Consolidated Financial Statements
[All amounts in U.S. dollars and all tabular amounts in millions, except per share figures, unless otherwise noted]
1.
SIGNIFICANT ACCOUNTING POLICIES
Magna International Inc. [collectively "Magna" or the "Company"] is a global automotive supplier whose product capabilities
include producing body, chassis, exterior, seating, powertrain, electronic, active driver assistance, vision, closure and roof
systems and modules, as well as complete vehicle engineering and contract manufacturing.
The consolidated financial statements have been prepared in U.S. dollars following accounting principles generally
accepted in the United States ["GAAP"].
Principles of consolidation
The Consolidated Financial Statements include the accounts of Magna and its subsidiaries in which Magna has a
controlling financial interest or is the primary beneficiary. Magna accounts for investments in companies over which it has
the ability to exercise significant influence but does not hold a controlling interest under the equity method, and records its
proportionate share of income or losses in Equity income in the Consolidated Statements of Income. The Company
presents non-controlling interests as a separate component within Shareholders' equity in the Consolidated
Balance Sheets.
Financial instruments
The Company classifies all of its financial assets and financial liabilities as trading, held-to-maturity investments, loans and
receivables, available-for-sale financial assets, or other financial liabilities. Held-for-trading financial instruments, which
include cash and cash equivalents and the Company's investment in asset-backed commercial paper ["ABCP"] are
measured at fair value and all gains and losses are included in net income in the period in which they arise. Held-to-maturity
investments, which include long-term interest bearing government securities held to partially fund certain Austrian lump
sum termination and long service payment arrangements, are recorded at amortized cost using the effective interest
method. Loans and receivables, which include accounts receivable, long-term receivables and accounts payable, are
recorded at amortized cost using the effective interest method. Available-for-sale financial assets are recorded at cost and
are subsequently measured at fair value with all revaluation gains and losses included in other comprehensive income.
Foreign currency translation
The Company operates globally, which gives rise to a risk that its earnings and cash flows may be adversely impacted by
fluctuations in foreign exchange rates.
Assets and liabilities of the Company's operations having a functional currency other than the U.S. dollar are translated into
U.S. dollars using the exchange rate in effect at year end, and revenues and expenses are translated at the average rate
during the year. Exchange gains or losses on translation of the Company's net investment in these operations are included
in comprehensive income and are deferred in accumulated other comprehensive income. Foreign exchange gains or
losses on debt that was designated as a hedge of the Company's net investment in these operations are also recorded in
accumulated other comprehensive income.
Foreign exchange gains and losses on transactions occurring in a currency other than an operation's functional currency
are reflected in income, except for gains and losses on foreign exchange contracts used to hedge specific future
commitments in foreign currencies and on intercompany balances which are designated as long-term investments. In
particular, the Company uses foreign exchange forward contracts for the sole purpose of hedging certain of the Company's
future committed foreign currency based outflows and inflows. Most of the Company's foreign exchange contracts are
subject to master netting arrangements that provide for the net settlement of contracts, by counterparty, in the event of
default or termination. All derivative instruments, including foreign exchange contracts, are recorded on the consolidated
balance sheet at fair value. The fair values of derivatives are recorded on a gross basis in prepaid expenses and other, other
assets, other accrued liabilities or other long-term liabilities. To the extent that cash flow hedges are effective, the change
in their fair value is recorded in other comprehensive income; any ineffective portion is recorded in net income. Amounts
accumulated in other comprehensive income are reclassified to net income in the period in which the hedged item affects
net income.
If the Company's foreign exchange forward contracts cease to be effective as hedges, for example, if projected foreign
cash inflows or outflows declined significantly, gains or losses pertaining to the portion of the hedging transactions in
excess of projected foreign currency denominated cash flows would be recognized in income at the time this condition
was identified.
2016 Annual Report – Financial Statements
32
Cash and cash equivalents
Cash and cash equivalents include cash on account, demand deposits and short-term investments with remaining
maturities of less than three months at acquisition.
Inventories
Production inventories and tooling inventories manufactured in-house are valued at the lower of cost and market, with cost
being determined substantially on a first-in, first-out basis. Cost includes the cost of materials plus direct labour applied to
the product and the applicable share of manufacturing overhead.
Outsourced tooling inventories are valued at the lower of subcontracted costs and market.
Long-lived assets
Fixed assets are recorded at historical cost. Depreciation is provided on a straight-line basis over the estimated useful lives
of fixed assets at annual rates of 21⁄2% to 5% for buildings, 7% to 10% for general purpose equipment and 10% to 33% for
special purpose equipment.
Definite-lived intangible assets, which have arisen principally through acquisitions and include customer relationship
intangibles and patents and licences. These definite-lived intangible assets are amortized on a straight-line basis over their
estimated useful lives which range from 4 to 15 years.
The Company assesses fixed and definite-lived intangible assets for recoverability whenever indicators of impairment
exist. If the carrying value of the asset exceeds the estimated undiscounted cash flows from the use of the asset, then an
impairment loss is recognized to write the asset down to fair value. The fair value of fixed and definite-lived intangible
assets is generally determined using estimated discounted future cash flows.
Goodwill
Goodwill represents the excess of the cost of an acquired enterprise over the fair value of the identifiable assets acquired
and liabilities assumed less any subsequent write-downs for impairment. Goodwill is reviewed for impairment in the fourth
quarter of each year, or more frequently if indicators of potential impairment exist. Goodwill impairment is assessed based
on a comparison of the fair value of a reporting unit to the underlying carrying value of the reporting unit's net assets,
including goodwill. When the carrying amount of the reporting unit exceeds its fair value, the fair value of the reporting
unit's goodwill is compared with its carrying amount to measure the amount of impairment, if any. The fair value of a
reporting unit is determined using the estimated discounted future cash flows of the reporting unit.
Other assets
Other assets include the long-term portion of certain receivables, which represent the recognized sales value of tooling
and design and engineering services provided to customers under certain long-term contracts. The receivables will be paid
in full upon completion of the contracts or in instalments based on forecasted production volumes. In the event that actual
production volumes are less than those forecasted, a reimbursement for any shortfall will be made.
Preproduction costs related to long-term supply agreements
Pre-operating costs incurred in establishing new facilities that require substantial time to reach commercial production
capability are expensed as incurred.
Costs incurred [net of customer subsidies] related to design and engineering, which are paid for as part of subsequent
production piece price amounts, are expensed as incurred unless a contractual guarantee for reimbursement exists.
Costs incurred [net of customer subsidies] related to design and development costs for moulds, dies and other tools that
the Company does not own [and that will be used in, and paid for as part of the piece price amount for, subsequent
production] are expensed as incurred unless the supply agreement provides a contractual guarantee for reimbursement or
the non-cancellable right to use the moulds, dies and other tools during the supply agreement.
Where these preproduction costs are deemed to be a single unit of account combined with a subsequent parts production,
the costs deferred in the above circumstances are included in other assets and amortized on a units-of-production basis to
cost of goods sold over the anticipated term of the supply agreement.
33
MAGNA INTERNATIONAL INC.
Warranty
The Company records product warranty liabilities based on its individual customer agreements. Under most customer
agreements, the Company only accounts for existing or probable claims on product default issues when amounts related
to such issues are probable and reasonably estimable. Under certain powertrain and complete vehicle engineering and
assembly contracts, the Company records an estimate of future warranty-related costs based on the terms of the specific
customer agreements and the specific customer's warranty experience.
Product liability provisions are established based on the Company's best estimate of the amounts necessary to settle
existing claims on product default issues. Recall costs are costs incurred when government regulators and/or the
customer decides to recall a product due to a known or suspected performance issue, and the Company is required to
participate, either voluntarily or involuntarily. Costs typically include the cost of the product being replaced, the customer's
cost of the recall and labour to remove and replace the defective part. When a decision to recall a product has been made or
is probable, the Company's portion of the estimated cost of the recall is recorded as a charge to income in that period. In
making this estimate, judgment is required as to the number of units that may be returned as a result of the recall, the total
cost of the recall campaign and the ultimate negotiated sharing of the cost between the Company, the customer and, in
some cases, a supplier to the Company.
The Company monitors warranty activity on an ongoing basis and adjusts reserve estimates when it is probable that future
warranty costs will be different than those estimates.
Employee future benefit plans
The cost of providing benefits through defined benefit pensions, lump sum termination and long service payment
arrangements, and post-retirement benefits other than pensions is actuarially determined and recognized in income using
the projected benefit method pro-rated on service and management's best estimate of expected plan investment
performance, salary escalation, retirement ages of employees and, with respect to medical benefits, expected health care
costs. Differences arising from plan amendments, changes in assumptions and experience gains and losses that are
greater than 10% of the greater of the accrued benefit obligation at the beginning of the year and the fair value, or market
related value, of plan assets at the beginning of the year, are recognized in income over the expected average remaining
service life of employees. Gains related to plan curtailments are recognized when the event giving rise to the curtailment
has occurred. Plan assets are valued at fair value. The cost of providing benefits through defined contribution pension plans
is charged to income in the period in respect of which contributions become payable.
The funded status of the plans is measured as the difference between the plan assets at fair value and the projected
benefit obligation ["PBO"]. The aggregate of all overfunded plans is recorded in other assets, and the aggregate of all
underfunded plans in long-term employee benefit liabilities. The portion of the amount by which the actuarial present value
of benefits included in the PBO exceeds the fair value of plan assets, payable in the next twelve months, is reflected in
other accrued liabilities. This is determined on a plan by plan basis.
Asset retirement obligation
The Company recognizes its obligation to restore leased premises at the end of the lease by recording at lease inception
the estimated fair value of this obligation as other long-term liabilities with a corresponding amount recognized as fixed
assets. The fixed asset amount is amortized over the period from lease inception to the time the Company expects to
vacate the premises, resulting in both depreciation and interest charges. The estimated fair value of the obligation is
assessed for changes in the expected timing and extent of expenditures with changes related to the time value of money
recorded as interest expense.
Revenue recognition
Revenue from the sale of manufactured products is recognized when the price is fixed or determinable, collectability is
reasonably assured and upon shipment to [or receipt by customers, depending on contractual terms], and acceptance
by customers.
Revenue from tooling and engineering services are accounted for as a separate revenue element only in circumstances
where the tooling and engineering has value to the customer on a standalone basis. Revenues from significant engineering
services and tooling contracts that qualify as separate revenue elements are recognized on a percentage of completion
basis. Percentage-of-completion is generally determined based on the proportion of accumulated expenditures to date as
compared to total anticipated expenditures.
Revenue and cost of goods sold, including amounts from engineering and tooling contracts, are presented on a gross basis
in the consolidated statements of income and comprehensive income when the Company is acting as principal and is
subject to significant risks and rewards in connection with the process of bringing the product to its final state and in the
post-sale dealings with its customers. Otherwise, components of revenues and related costs are presented on a net basis.
With respect to vehicle assembly sales, given that Magna is acting as principal with respect to purchased components and
systems, the selling price to the customer includes the costs of such inputs.
2016 Annual Report – Financial Statements
34
Government assistance
The Company makes periodic applications for financial assistance under available government assistance programs in the
various jurisdictions that the Company operates. Grants relating to capital expenditures are reflected as a reduction of the
cost of the related assets. Grants relating to current operating expenditures are generally recorded as a reduction of the
related expense at the time the eligible expenses are incurred. The Company also receives tax credits and tax super
allowances, the benefits of which are recorded as a reduction of income tax expense. In addition, the Company receives
loans which are recorded as liabilities in amounts equal to the cash received. When a government loan is issued to the
Company at a below-market rate of interest, the loan is initially recorded at its net present value, and accreted to its face
value over the period of the loan. The benefit of the below-market rate of interest is accounted for like a government grant.
It is measured as the difference between the initial carrying value of the loan and the cash proceeds received.
Income taxes
The Company uses the liability method of tax allocation to account for income taxes. Under the liability method of tax
allocation, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
No deferred tax liability is recorded for taxes on undistributed earnings and translation adjustments of foreign subsidiaries if
these items are either considered to be reinvested for the foreseeable future or if they are available for repatriation and are
not subject to further tax on remittance. Taxes are recorded on such foreign undistributed earnings and translation
adjustments when it becomes apparent that such earnings will be distributed in the foreseeable future and the Company
will incur further significant tax on remittance.
Recognition of uncertain tax positions is dependent on whether it is more-likely-than-not that a tax position taken or
expected to be taken in a tax return will be sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. A tax position that meets the more-likely-than-not
recognition threshold is measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon
ultimate settlement. The Company recognizes interest and penalties related to uncertain tax positions in income
tax expense.
Comprehensive income
Other comprehensive income includes unrealized gains and losses on translation of the Company's foreign operations that
use the local currency as the functional currency, the change in fair value of available-for-sale investments, net of taxes, the
change in unamortized actuarial amounts, net of taxes and to the extent that cash flow hedges are effective, the change in
their fair value, net of income taxes.
Accumulated other comprehensive income is a separate component of shareholders' equity which includes the
accumulated balances of all components of other comprehensive income which are recognized in comprehensive income
but excluded from net income.
Earnings per Common Share
Basic earnings per Common Share are calculated on net income attributable to Magna International Inc. using the
weighted average number of Common Shares outstanding during the year.
Diluted earnings per Common Share are calculated on the weighted average number of Common Shares outstanding,
including an adjustment for stock options outstanding using the treasury stock method.
Common Shares that have not been released under the Company's restricted stock plan or are being held in trust for
purposes of the Company's restricted stock unit program have been excluded from the calculation of basic earnings per
share but have been included in the calculation of diluted earnings per share.
Discontinued operations
The Company reports financial results for discontinued operations separately from continuing operations to distinguish the
financial impact of disposal transactions from ongoing operations. Discontinued operations reporting only occurs when the
disposal of a component or a group of components of the Company represents a strategic shift that will have a major
impact on the Company's operations and financial results. In the third quarter of 2015, the Company sold substantially all of
its interiors operations. Accordingly, for the year ended December 31, 2015 the operating results and operating cash flows
for the disposed interiors operations are presented as discontinued operations separate from the Company's continuing
operations. Financial information related to the interiors operations has been excluded from both continuing operations and
segment results in the consolidated financial statements. Refer to Note 3 Discontinued Operations for further information
regarding the Company's discontinued operations.
35
MAGNA INTERNATIONAL INC.
Use of estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
2.
ACCOUNTING STANDARDS
Accounting Changes
Pension and other Post-Retirement Benefit Plans
At December 31, 2016, the Company changed the method used to estimate the service and interest components of net
periodic benefit cost for pension and other post-retirement benefits for plans that utilize a yield curve approach. This
change compared to the previous method will result in different service and interest components of net periodic benefit
cost (credit) in future periods. Historically, the Company estimated these service and interest cost components utilizing a
single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning
of the period. The Company elected to utilize a full yield curve approach in the estimation of these components by applying
the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected
cash flows. The Company made this change to provide a more precise measurement of service and interest costs by
improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change
does not affect the measurement of the total benefit obligations or annual net periodic benefit cost (credit) as the change in
the service and interest costs is completely offset in the net actuarial (gain) loss reported. The change in the service and
interest costs was not significant. The Company has accounted for this change as a change in accounting estimate.
Simplifying the Presentation of Debt Issuance Costs
In the first quarter of 2016, the Company adopted Accounting Standards Update No. 2015-03 "Interest - Imputation of
Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs". This guidance requires that debt
issuance costs be presented as a direct reduction to the carrying amount of the related debt in the balance sheet rather
than as an asset. Consequently, the Company has reclassified $19 million of deferred debt issuance costs from other
assets to long-term debt in the consolidated balance sheet as at December 31, 2015.
Future Accounting Standards
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers: Topic 606 (ASU 2014-09)", to
supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize
revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that
is expected to be received for those goods or services. In July 2015, the FASB deferred the effective date to annual
reporting periods beginning after December 15, 2017 [including interim reporting periods within those periods]. ASU
2014-09 is effective for the Company in the first quarter of fiscal 2018 using either of two methods: [i] retrospective to each
prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or [ii]
retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and
providing certain additional disclosures as defined per ASU 2014-09. The Company has not yet selected a transition
method and continues to evaluate the impact that ASU 2014-09 will have on its consolidated financial statements and
related disclosures. In addition, new controls and processes designed to comply with ASU 2014-09 will be implemented
and tested throughout 2017 to permit adoption by January 1, 2018.
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases: Topic 842 (ASU 2016-02)", to supersede nearly all existing
lease guidance under GAAP. The guidance would require lessees to recognize most leases on their balance sheets as lease
liabilities with corresponding right-of-use assets. ASU 2016-02 is effective for the Company in the first quarter of fiscal
2019 using a modified retrospective approach with the option to elect certain practical expedients. Early adoption is
permitted. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated financial statements.
Statement of Cash Flows
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18),
which provides amendments to current guidance to address the classification and presentation of changes in restricted
cash in the statement of cash flows. ASU 2016-18 is effective for the Company in the first quarter of fiscal 2018 and earlier
adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-18 on its consolidated
financial statements.
2016 Annual Report – Financial Statements
36
Income Taxes
In October 2016, the FASB issued ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets
Other than Inventory. This guidance requires that the tax effects of all intra-entity sales of assets other than inventory be
recognized in the period in which the transaction occurs. The new guidance is effective for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. Early adoption as of the beginning of an annual reporting
period is permitted. The guidance is to be applied on a modified retrospective basis through a cumulative-effect
adjustment to retained earnings as of the beginning of the period of adoption. The adoption of this guidance is not
expected to have a significant impact on the Company's consolidated financial statements.
Goodwill
In January 2017, the FASB issued new guidance, ASU No. 2017-4, Intangibles-Goodwill and Other (Topic 350): Simplifying
the test for Goodwill Impairment. This guidance simplifies subsequent goodwill measurement by eliminating Step 2 from
the goodwill impairment test. Under this update, an entity should perform its annual, or interim, goodwill impairment test
by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge
for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should
not exceed the total amount of goodwill allocated to that reporting unit. The new standard is effective for annual periods,
and interim periods within those annual periods, beginning after December 15, 2019 with early adoption permitted for
annual goodwill impairment tests performed after January 1, 2017. The standard must be applied prospectively. Upon
adoption, the standard will impact how the Company assesses goodwill for impairment. The adoption of this guidance is
not expected to have a significant impact on the Company's consolidated financial statements.
3.
DISCONTINUED OPERATIONS
On August 31, 2015, the Company sold substantially all of its interiors operations ["the interiors operations"]. The Company
recognized a gain on the divestiture within income from discontinued operations as follows:
Proceeds on disposal, net of transaction costs
Net assets disposed
Pre-tax gain on divestiture
Income taxes
Gain on divestiture, net of tax
$
$
549
438
111
66
45
There were no amounts related to the interiors operations classified as discontinued operations for the year ended
December 31, 2016. The following table summarizes the results of the interiors operations classified as discontinued
operations for the year ended December 31, 2015:
Sales
Costs and expenses
Cost of goods sold
Depreciation and amortization
Selling, general and administrative
Equity income
Income from discontinued operations before income taxes and gain on divestiture
Income taxes
Income from discontinued operations before gain on divestiture
Gain on divestiture of discontinued operations, net of tax
Income from discontinued operations, net of tax
2015
$ 1,737
1,635
13
58
(11)
42
20
22
45
67
$
The interiors operations were previously included within all of the Company's reporting segments except for Rest
of World.
37
MAGNA INTERNATIONAL INC.
4.
OTHER EXPENSE (INCOME), NET
Other expense (income), net consists of significant items such as: restructuring charges generally related to significant
plant closures or consolidations; impairment charges; gains or losses on disposal of facilities; re-measurement gains on
acquisitions; and other items not reflective of on-going operating profit or loss. Other expense (income), net consists of:
North America [a]
Gain on disposal of Bestop
Pension settlement
Europe [b]
Restructuring charges
Gain on disposal of battery pack business
[a] North America
For the year ended December 31, 2016
2016
2015
$
–
13
13
17
–
17
$ (136)
–
(136)
27
(57)
(30)
$ 30
$ (166)
During the fourth quarter of 2016, the Company offered a limited lump-sum payout to certain terminated vested plan
participants of its U.S. defined benefit pension plans. As a result of the partial settlement, the Company recognized a
$13 million [$9 million after tax] non-cash settlement charge.
For the year ended December 31, 2015
During 2015, the Company entered into a joint venture arrangement for the manufacture and sale of roof and other
accessories for the Jeep market to original equipment manufacturers as well as aftermarket customers. The
Company 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 the Company recognized
a gain of $136 million [$80 million after tax]. The Company accounts for its ownership as an equity investment since
Magna has significant influence through its voting rights, but does not control the joint venture.
[b] Europe
For the year ended December 31, 2016
During 2016, the Company recorded net restructuring charges of $17 million [$17 million after tax] in Germany at a
powertrain systems facility.
For the year ended December 31, 2015
During 2015, the Company recorded net restructuring charges of $27 million [$27 million after tax] primarily in
Germany at its exterior systems and roof systems operations.
During 2015, the Company sold its battery pack business to Samsung SDI for gross proceeds of approximately
$120 million, resulting in a gain of $57 million [$42 million after tax].
2016 Annual Report – Financial Statements
38
5.
EARNINGS PER SHARE
Earnings per share are computed as follows:
Income available to Common shareholders:
Net income from continuing operations
(Income) loss from continuing operations attributable to non-controlling interests
Net income attributable to Magna International Inc. from continuing operations
Income from discontinued operations, net of tax
Net income attributable to Magna International Inc.
Weighted average shares outstanding:
Basic
Adjustments
Stock options and restricted stock [a]
Diluted
2016
2015
$ 2,074
(43)
2,031
–
$ 2,031
391.0
2.2
393.2
$ 1,940
6
1,946
67
$ 2,013
407.5
5.2
412.7
[a] Diluted earnings per Common Share exclude 3.4 million [2015 – 0.9 million] Common Shares issuable under the
Company's Incentive Stock Option Plan because these options were not "in-the-money".
Earnings per Common Share:
Basic:
Continuing operations
Discontinued operations
Attributable to Magna International Inc.
Diluted:
Continuing operations
Discontinued operations
Attributable to Magna International Inc.
2016
2015
$ 5.19
–
$ 5.19
$ 5.16
–
$ 5.16
$ 4.78
0.16
$ 4.94
$ 4.72
0.16
$ 4.88
The dilutive effect of participating securities using the two-class method was excluded from the calculation of earnings per
share because the effect would be immaterial.
6.
DETAILS OF CASH FROM OPERATING ACTIVITIES
[a] Cash and cash equivalents consist of:
Bank term deposits, bankers' acceptances and government paper
Cash
[b]
Items not involving current cash flows:
Depreciation and amortization
Amortization of other assets included in cost of goods sold
Other non-cash charges
Deferred income taxes [note 12]
Equity income in excess of dividends received
Non-cash portion of Other (income) expense, net [note 4]
2016
$ 498
476
$ 974
2016
$ 1,056
135
27
22
(9)
–
$ 1,231
2015
$ 2,572
291
$ 2,863
2015
802
110
44
(7)
(20)
(193)
736
$
$
39
MAGNA INTERNATIONAL INC.
[c] Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other
Accounts payable
Accrued salaries and wages
Other accrued liabilities
Income taxes payable
7.
ACQUISITIONS
Acquisitions in the year ended December 31, 2016
2016
2015
$ (446)
(159)
189
562
94
(145)
(14)
81
$
$ (410)
(241)
13
139
43
72
40
$ (344)
On January 4, 2016, the Company completed the acquisition of 100% of the common shares and voting interests of the
GETRAG Group of Companies ["GETRAG"]. GETRAG is a global supplier of automotive transmission systems, including manual,
automated-manual, dual clutch, hybrid and other advanced systems. The purchase price was $1.9 billion [net of $136 million
cash acquired]. The acquired business has sales primarily to BMW, Audi, Jiangling Motors, Ford, Volvo and Dongfeng.
The acquisition of GETRAG was accounted for as a business combination. The following table summarizes the amounts
recognized for assets acquired and liabilities assumed:
Preliminary
amounts recognized
at March 31, 2016
Measurement
period
adjustments
Final
allocation
Cash
Non-cash working capital
Investments
Fixed assets
Goodwill
Other assets
Intangibles
Deferred tax assets
Long-term employee benefit liabilities
Long-term debt
Other long-term liabilities
Deferred tax liabilities
Non-controlling interest
Consideration paid
Less: Cash acquired
Net cash outflow
$
136
(466)
1,719
468
430
60
218
43
(125)
(116)
(9)
(137)
(303)
1,918
(136)
$ 1,782
$
$
–
71
(222)
(23)
160
(36)
154
(9)
(12)
(1)
(43)
18
16
73
–
73
$
136
(395)
1,497
445
590
24
372
34
(137)
(117)
(52)
(119)
(287)
1,991
(136)
$ 1,855
The measurement period adjustments primarily reflect: [i] changes in the estimated fair value of the acquired equity
method investments; [ii] changes in the estimated fair value of the acquired patents and customer relationship intangibles;
and [iii] a working capital adjustment due to an increase in the total fair value of consideration transferred. This resulted in a
net adjustment to goodwill of $160 million.
The measurement period adjustments did not result from intervening events subsequent to the acquisition date and did
not have a material impact on the Company's earnings in any period. The final allocation of the consideration transferred to
the assets acquired and liabilities assumed has been completed.
The investments amount includes the following equity investments that were acquired as part of the business
combination:
GETRAG Ford Transmission GmbH ["GFT"]
GETRAG (Jiangxi) Transmission Co., Ltd ["GJT"] [i]
Dongfeng GETRAG Transmission Co. Ltd ["DGT"]
Ownership
percentage
Investment
balance
50.0%
50.0%
50.0%
$
340
$ 1,077
80
$
[i] GJT is 66.7% owned by one of the Company's consolidated subsidiaries which has a 25% non-controlling interest. As
a result, the investment balance was derived using 66.7% of the fair value.
2016 Annual Report – Financial Statements
40
The Company accounts for the investments under the equity method since it has the ability to exercise significant
influence but does not hold a controlling financial interest.
Recognized goodwill is attributable to the assembled workforce, expected synergies and other intangible assets that do
not qualify for separate recognition. All of the goodwill recognized was assigned to the Company's European segment.
Intangible assets consist primarily of amounts recognized for the fair value of customer relationship intangibles and
patents. These amortizable intangible assets are being amortized on a straight-line basis over a 15 year estimated
useful life.
Sales and net income for the acquired GETRAG entities for the year ended December 31, 2016 were $2.0 billion and
$45 million, respectively.
The following table provides consolidated supplemental pro forma information as if the acquisition of GETRAG had
occurred on January 1, 2015.
Sales
Net income attributable to Magna International Inc.
December 31, 2015
$ 34,150
1,992
$
The unaudited pro forma financial results do not include any anticipated synergies or other expected benefits of the
acquisition. This information is presented for informational purposes only and is not indicative of future operating results.
Other
During the fourth quarter of 2016, the Company acquired 100% of the equity interest in the B ¨OCO Group of Companies
["B ¨OCO"]. B ¨OCO is an automotive supplier of latches, hinges and strikers, with sales primarily to the BMW Group, Daimler
and Audi.
During the second quarter of 2016, the Company acquired 100% of the equity interest in Telemotive AG, an engineering
service provider in the field of automotive electronics. The acquired business has sales primarily to BMW, Volkswagen
and Daimler.
These entities have been included in our consolidated results of operations since their respective acquisition dates.
Pro forma results of operations during the current period have not been presented because the effects of these
acquisitions, individually and in aggregate, were not material to the Company's consolidated results of operations.
Acquisitions in the year ended December 31, 2015
On December 10, 2015, the Company entered into a partnership agreement in China [the "Xingqiaorui Partnership"] with
Chongqing Xingqiaorui. Under the terms of the arrangement, Xingqiaorui transferred a 53% controlling interest in its three
China manufacturing facilities and cash consideration of $36 million. In exchange, the Company transferred a 47%
non-controlling equity interest in its Chongqing manufacturing facility and cash consideration of $130 million to Xingqiaorui.
The acquisition of the 53% controlling interest in the China manufacturing facilities was accounted for as a business
combination.
On November 30, 2015, the Company acquired a 100% interest in Stadco Automotive Ltd. ["Stadco"] for total cash
consideration of $115 million. Stadco, based in the United Kingdom, is a supplier of steel and aluminum stampings as well
as vehicle assemblies primarily to Jaguar and Land Rover.
The final allocation of the consideration transferred to the assets acquired and liabilities assumed for both the Xingqiaorui
Partnership and Stadco has been completed. As a result of additional information obtained, changes to the preliminary fair
values of certain property, plant and equipment, definite-lived intangible assets and contingent tax liabilities, from the
amounts disclosed as of December 31, 2015 were recorded during the three months ended December 31, 2016, resulting
in a net adjustment to goodwill of $14 million. These adjustments did not have a material impact on the Company's
earnings in any period.
41
MAGNA INTERNATIONAL INC.
8.
INVENTORIES
Inventories consist of:
Raw materials and supplies
Work-in-process
Finished goods
Tooling and engineering
2016
2015
$ 1,007
264
327
1,206
$ 2,804
$
843
246
311
1,164
$ 2,564
Tooling and engineering inventory represents costs incurred on tooling and engineering services contracts in excess of
billed and unbilled amounts included in accounts receivable.
9.
INVESTMENTS IN AFFILIATED COMPANIES
The Company uses the equity method of accounting for its investments in entities over which it does not have control, but
is able to exercise significant influence over operating and financial policies.
The ownership percentages and carrying value of the Company's principal equity method investments at December 31
were as follows [in millions, except percentages]:
Litens Automotive Partnership ["Litens"] [i]
GETRAG (Jiangxi) Transmission Co., Ltd
GETRAG Ford Transmission GmbH
Dongfeng GETRAG Transmission Co. Ltd [ii]
76.7%
50.0%
50.0%
50.0%
2016
$
173
$ 1,015
325
$
79
$
2015
$ 138
–
$
–
$
–
$
[i]
Litens – The Company accounts for its investment in Litens under the equity method of accounting as a result of
significant participating rights that prevent control.
[ii] DGT – DGT is a variable interest entity ["VIE"] and depends on the Company and the Dongfeng Motor Group Company
for any additional cash needs. The Company cannot make key operating decisions considered to be most significant to
the VIE, and is therefore not considered to be the primary beneficiary. Our known maximum exposure to loss
approximated the carrying value of our investment balance as at December 31, 2016.
A summary of the total financial results, as reported by the Company's equity method investees, in the aggregate, at
December 31 was as follows:
Summarized Balance Sheets
Current assets
Non-current assets
Current liabilities
Long-term liabilities
Summarized Income Statements
Sales
Cost of goods sold, expenses and income taxes
Net income
2016
$ 2,478
$ 4,450
$ 2,329
$ 1,268
2015
$ 905
$ 756
$ 806
$ 335
2016
2015
$ 5,009
4,668
341
$
$ 3,168
2,886
282
$
No impairment charges were recorded for the years ended December 31, 2016 and 2015. Sales to equity method
investees were approximately $214 million and $98 million in 2016 and 2015 respectively.
2016 Annual Report – Financial Statements
42
Variable Interest Entities
The Company has determined that two of its investees acquired as part of the GETRAG acquisition are variable interest
entities, in which the Company is the primary beneficiary and has the power to direct the activities that are considered
most significant to the entities. As a result, the assets, liabilities, and results of operations of these variable interest entity
are included in the Company's Consolidated Financial Statements. The Company's maximum exposure to any potential
losses associated with these affiliated companies is limited to its investment, and was $187 million at December 31, 2016.
The carrying amounts and classification of assets and liabilities included in the Company's consolidated balance sheet
related to the consolidated VIEs are as follows:
Current assets
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
2016
$ 256
221
$ 477
$ 288
2
$ 290
Assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy
claims against the Company's general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do
not represent additional claims on the Company's general assets; rather, they represent claims against the specific assets
of the consolidated VIEs.
10.
FIXED ASSETS
Fixed assets consist of:
Cost
Land
Buildings
Machinery and equipment
Accumulated depreciation
Buildings
Machinery and equipment
2016
2015
$
254
1,942
12,349
14,545
$
259
1,659
11,016
12,934
(652)
(6,871)
(590)
(6,396)
$ 7,022
$ 5,948
Included in the cost of fixed assets are construction in progress expenditures of $1.0 billion [2015 - $1.3 billion] that have
not been depreciated.
11.
GOODWILL
The following is a continuity of the Company's goodwill by segment:
Balance, December 31, 2014
Acquisitions [note 7]
Foreign exchange and other
Balance, December 31, 2015
Acquisitions [note 7]
Foreign exchange and other
Balance, December 31, 2016
North
America
$ 633
–
(43)
590
–
5
$ 595
Europe
$
577
13
(65)
525
620
(29)
$ 1,116
Asia
$ 127
107
(5)
229
(5)
(12)
$ 212
Total
$ 1,337
120
(113)
1,344
615
(36)
$ 1,923
43
MAGNA INTERNATIONAL INC.
12.
INCOME TAXES
[a] The provision for income taxes differs from the expense that would be obtained by applying the Canadian statutory
income tax rate as a result of the following:
Canadian statutory income tax rate
Manufacturing and processing profits deduction
Foreign rate differentials
Losses not benefited
Utilization of losses previously not benefited
Earnings of equity accounted investees
Tax on repatriation of foreign earnings
Valuation allowance on deferred tax assets [i]
Write off of investment [ii]
Research and development tax credits
Reserve for uncertain tax positions
Non-deductible foreign exchange losses [iii]
Others
Effective income tax rate
2016
2015
26.5%
(0.3)
(0.2)
0.8
(0.2)
(1.2)
0.7
(0.4)
–
(1.5)
0.2
1.3
(0.3)
25.4%
26.5%
(0.4)
0.8
1.1
(0.1)
(0.8)
2.1
–
(1.4)
(1.3)
(0.3)
1.0
(0.4)
26.8%
[i] GAAP requires that the Company assess whether valuation allowances should be established or maintained
against its deferred tax assets, based on consideration of all available evidence, using a "more-likely-than-not"
standard. The factors the Company uses to assess the likelihood of realization are its history of losses, forecasts
of future pre-tax income and tax planning strategies that could be implemented to realize the deferred tax assets.
[ii] During 2015, the Company recorded a benefit related to the write-off of historical tax basis in one of its South
American subsidiaries.
[iii] Non-deductible foreign exchange losses are related to the re-measurement of financial statement balances of
foreign subsidiaries, primarily in Mexico, that are maintained in a currency other than their functional currency.
[b] The details of income before income taxes by jurisdiction are as follows:
Canadian
Foreign
[c] The details of the income tax provision are as follows:
Current
Canadian
Foreign
Deferred
Canadian
Foreign
2016
2015
$
617
2,163
$ 2,780
$
590
2,061
$ 2,651
2016
2015
$ 127
559
686
16
4
20
$ 706
$ 140
578
718
14
(21)
(7)
$ 711
2016 Annual Report – Financial Statements
44
[d] Deferred income taxes have been provided on temporary differences, which consist of the following:
Tax depreciation greater than book depreciation
Book amortization (in excess of) less than tax amortization
Liabilities currently not deductible for tax
Net tax losses benefited
Change in valuation allowance on deferred tax assets
Tax on undistributed foreign earnings
Others
[e] Deferred tax assets and liabilities consist of the following temporary differences:
Assets
Tax benefit of loss carryforwards
Liabilities currently not deductible for tax
Tax credit carryforwards
Unrealized loss on cash flow hedges and retirement liabilities
Other assets tax value in excess of book values
Others
Valuation allowance against tax benefit of loss carryforwards
Other valuation allowance
Liabilities
Tax depreciation in excess of book depreciation
Tax on undistributed foreign earnings
Unrealized gain on cash flow hedges and retirement liabilities
2016
2015
$
$
58
(41)
48
(31)
(12)
8
(10)
20
$
$
12
7
–
(13)
(1)
3
(15)
(7)
2016
2015
$
715
106
22
134
36
21
1,034
(615)
(66)
353
277
98
3
378
$
614
211
24
154
11
5
1,019
(562)
(50)
407
249
10
9
268
Net deferred tax (liabilities) assets
$
(25)
$
139
The net deferred tax (liabilities) assets are presented on the consolidated balance sheet in the following categories:
Long-term deferred tax assets
Long-term deferred tax liabilities
2016
2015
$
$
268
(293)
(25)
$
$
271
(132)
139
[f] The Company has provided for deferred income taxes for the estimated tax cost of distributable earnings of its
subsidiaries. Deferred income taxes have not been provided on approximately $4.46 billion of undistributed earnings
of certain foreign subsidiaries, as the Company has concluded that such earnings should not give rise to additional tax
liabilities upon repatriation or are indefinitely reinvested. A determination of the amount of the unrecognized tax
liability relating to the remittance of such undistributed earnings is not practicable.
[g]
Income taxes paid in cash [net of refunds] were $707 million for the year ended December 31, 2016 [2015 -
$647 million].
[h] As of December 31, 2016, the Company had domestic and foreign operating loss carryforwards of $2.29 billion and tax
credit carryforwards of $22 million. Approximately $1.65 billion of the operating losses can be carried forward
indefinitely. The remaining operating losses and tax credit carryforwards expire between 2017 and 2036.
45
MAGNA INTERNATIONAL INC.
[i] As at December 31, 2016 and 2015, the Company's gross unrecognized tax benefits were $220 and $221 million,
respectively [excluding interest and penalties], of which $201 and $158 million, respectively, if recognized, would
affect the Company's effective tax rate. The gross unrecognized tax benefits differ from the amount that would affect
the Company's effective tax rate due primarily to the impact of the valuation allowance on deferred tax assets. A
summary of the changes in gross unrecognized tax benefits is as follows:
Balance, beginning of year
Increase based on tax positions related to current year
(Decrease) increase based on tax positions of prior years
Increase related to business acquisitions
Settlements
Statute expirations
Foreign currency translation
2016
$ 221
21
(52)
44
(2)
(8)
(4)
$ 220
2015
$ 202
17
53
–
(15)
(20)
(16)
$ 221
The Company recognizes interest and penalties with respect to unrecognized tax benefits as income tax expense. As
at December 31, 2016 and 2015, the Company had recorded interest and penalties on the unrecognized tax benefits
of $35 and $21 million, respectively, which reflects expenses related to changes in its reserves for interest and
penalties of $14 and $3 million, respectively.
The Company operates in multiple jurisdictions throughout the world, and its tax returns are periodically audited or
subject to review by both domestic and foreign tax authorities. During the next twelve months, it is reasonably
possible that, as a result of audit settlements, the conclusion of current examinations and the expiration of the statute
of limitations in several jurisdictions, the Company may decrease the amount of its gross unrecognized tax benefits
[including interest and penalties] by approximately $62 million, of which $52 million, if recognized, would affect its
effective tax rate.
The Company considers its significant tax jurisdictions to include Canada, the United States, Austria, Germany and
Mexico. With few exceptions, the Company remains subject to income tax examination in Germany for years after
2007, in Austria for years after 2008, Mexico for years after 2010, and in Canada and the U.S. federal jurisdiction for
years after 2012.
13.
INTANGIBLE ASSETS
Intangible assets were as follows:
Cost
Customer relationship intangibles [note 7]
Computer software
Patent and licenses
Accumulated depreciation
Customer relationship intangibles [note 7]
Computer software
Patent and licenses
Estimated weighted
average useful
life in years
2016
2015
12
4
15
$
$
392
316
278
986
(96)
(242)
(27)
621
$
$
134
278
39
451
(53)
(221)
(8)
169
The Company recorded approximately $100 million and $48 million of amortization expense related to definite-lived
intangible assets for the years ended December 31, 2016 and 2015, respectively. The Company currently estimates annual
amortization expense to be $90 million for 2017, $82 million for 2018, $66 million for 2019, $47 million for 2020 and
$44 million for 2021.
2016 Annual Report – Financial Statements
46
14.
OTHER ASSETS
Other assets consist of:
Preproduction costs related to long-term supply agreements
with contractual guarantee for reimbursement
Long-term receivables [note 22[c]]
Pension overfunded status [note 18[a]]
Unrealized gain on cash flow hedges [note 22]
Other, net
2016
2015
$ 420
229
21
6
43
$ 719
$ 276
87
17
5
27
$ 412
15.
EMPLOYEE EQUITY AND PROFIT PARTICIPATION PROGRAM
During the year ended December 31, 2016, a trust, which exists to make orderly purchases of the Company's shares for
employees for transfer to the Employee Equity and Profit Participation Program ["EEPPP"], borrowed up to $10 million
[2015 - $55 million] from the Company to facilitate the purchase of Common Shares. At December 31, 2016, the trust's
indebtedness to Magna was $10 million [2015 - $5 million]. The Company nets the receivable from the trust with the
Company's accrued EEPPP payable in accrued wages and salaries.
16. WARRANTY
The following is a continuity of the Company's warranty accruals:
Balance, beginning of year
Expense, net
Settlements
Acquisitions [i]
Foreign exchange and other
2016
$
59
101
(59)
174
(5)
$ 270
2015
$ 80
26
(53)
–
6
$ 59
[i]
$127 million of the acquisition balance relates to a pre-acquisition settlement agreement negotiated with a customer
and a supplier for a specific performance issue [note 7].
17.
DEBT
Short-term borrowings
The Company's short-term borrowings consist of the following:
Bank indebtedness [i]
Commercial paper [ii]
2016
$
8
615
$ 623
2015
$ 25
–
$ 25
[i]
In the third quarter of 2016, the Company entered into an agreement for a credit facility that is drawn in euros. The
Company is required to secure any amounts drawn on the facility with a USD cash deposit of 105% of the outstanding
euro balance. As of December 31, 2016, the gross amount outstanding under the credit facility was $185 million
[c175 million]. The credit agreement includes a netting arrangement with the bank that provides for the legal right of
setoff. Accordingly, as at December 31, 2016, this liability balance was offset against the related restricted cash
deposit of $194 million. The remaining net cash deposit of $9 million was included in the prepaid expenses and other
balance, and is restricted under the terms of the loan.
[ii] During 2016, the Company established a U.S. commercial paper program [the "U.S. Program"] and a euro-commercial
paper program [the "euro-Program"]. Under the U.S. Program, the Company may issue U.S. commercial paper
notes [the "U.S. notes"] up to a maximum aggregate amount of U.S. $500 million. The U.S. Program is supported by
the Company's existing global credit facility. The proceeds from the issuance of the U.S. notes are being used for
general corporate purposes. As at December 31, 2016, $295 million of U.S. notes were outstanding, with a weighted-
average interest rate of 1.04%, and maturities generally less than three months.
Under the euro-Program, the Company may issue euro-commercial paper notes [the "euro notes"] up to a maximum
aggregate amount of c500 million or its equivalent in alternative currencies. The euro notes issued are being guaranteed by
the Company's existing global credit facility. The proceeds from the issuance of the euro notes are being used for general
corporate purposes. As of December 31, 2016, $320 million [c304 million] of euro notes were outstanding, with a negative
weighted-average interest rate of 0.07%, and maturities generally less than three months.
47
MAGNA INTERNATIONAL INC.
Long-term borrowings
[a] The Company's long-term debt, which is substantially uncollateralized, consists of the following:
2016
2015
Senior Notes [note 17 [c]]
$750 million Senior Notes due 2024 at 3.625%
$650 million Senior Notes due 2025 at 4.150%
c550 million Senior Notes due 2023 at 1.900%
Cdn$425 million Senior Notes due 2022 at 3.100%
Bank term debt at a weighted average interest rate of approximately 7.3%
[2015 - 8.1%], denominated primarily in Indian rupee,
Chinese renminbi, euro and Brazilian real
Government loans at a weighted average interest rate of approximately
2.53% [2015 - 3.7%], denominated primarily in euro, Canadian dollar and
Brazilian real
Other
Less due within one year
$
746
643
576
315
117
92
44
2,533
139
$ 2,394
[b] Future principal repayments on long-term debt are estimated to be as follows:
2017
2018
2019
2020
2021
Thereafter
$
745
643
592
305
202
9
42
2,538
211
$ 2,327
$
139
39
26
22
20
2,287
$ 2,533
[c] All of the Senior Notes pay a fixed rate of interest semi-annually except for the c550 million Senior Notes which pay a
fixed rate of interest annually. The Senior Notes are unsecured obligations and do not include any financial covenants.
The Company may redeem the Senior Notes in whole or in part at any time, at specified redemption prices determined
in accordance with the terms of each of the respective indentures governing the Senior Notes. All of the Senior Notes
were issued for general corporate purposes.
[d] The Company's $2.75 billion revolving credit facility matures on June 22, 2021. The facility includes a $200 million
Asian tranche, a $100 million Mexican tranche and a tranche for Canada, U.S. and Europe, which is fully transferable
between jurisdictions and can be drawn in U.S. dollars, Canadian dollars or euros.
[e]
Interest expense, net includes:
Interest expense
Current
Long-term
Interest income
Interest expense, net
2016
2015
$
22
78
100
(12)
$
88
$ 20
38
58
(14)
$ 44
[f]
Interest paid in cash was $99 million for the year ended December 31, 2016 [2015 - $54 million].
[g] At December 31, 2016, the Company had commitments under operating leases requiring annual rental payments
as follows:
2017
2018
2019
2020
2021
Thereafter
For the year ended December 31, 2016, operating lease expense was $314 million [2015 - $285 million].
2016 Annual Report – Financial Statements
$
Total
277
237
208
183
164
586
$ 1,655
48
18.
LONG-TERM EMPLOYEE BENEFIT LIABILITIES
Long-term employee benefit liabilities consist of:
Defined benefit pension plans and other [a]
Termination and long service arrangements [b]
Retirement medical benefits plans [c]
Other long-term employee benefits
Long-term employee benefit obligations
[a] Defined benefit pension plans
2016
$ 313
319
29
6
$ 667
2015
$ 181
287
30
6
$ 504
The Company sponsors a number of defined benefit pension plans and similar arrangements for its employees. All
pension plans are funded to at least the minimum legal funding requirements, while European defined benefit pension
plans are unfunded.
The weighted average significant actuarial assumptions adopted in measuring the Company's obligations and costs
are as follows:
Projected benefit obligation
Discount rate
Rate of compensation increase
Net periodic benefit cost
Discount rate
Rate of compensation increase
Expected return on plan assets
Information about the Company's defined benefit pension plans is as follows:
Projected benefit obligation
Beginning of year
Current service cost
Interest cost
Actuarial losses (gains) and changes in actuarial assumptions
Benefits paid
Benefits paid – settlements [i]
Acquisition
Gain on settlement
Foreign exchange
End of year
Plan assets at fair value [ii]
Beginning of year
Return on plan assets
Employer contributions
Benefits paid
Benefits paid – settlements [i]
Acquisition
Foreign exchange
End of year
Ending funded status
2016
3.1%
2.3%
3.2%
2.4%
5.8%
2015
3.8%
2.5%
3.7%
2.7%
5.9%
2016
2015
$ 493
14
21
28
(22)
(32)
129
(5)
(2)
624
326
22
19
(17)
(32)
8
4
330
$ 536
12
18
(18)
(18)
–
1
–
(38)
493
347
7
19
(18)
–
–
(29)
326
$ 294
$ 167
49
MAGNA INTERNATIONAL INC.
Amounts recorded in the consolidated balance sheet
Non-current asset [note 14]
Current liability
Non-current liability
Net amount
Amounts recorded in accumulated other comprehensive income
Unrecognized actuarial losses
Net periodic benefit cost
Current service cost
Interest cost
Return on plan assets
Benefits paid – settlements [i]
Actuarial losses
Net periodic benefit cost
2016
2015
$ (21)
2
313
$ 294
$
(17)
3
181
$ 167
$ (144)
$ (138)
$
$
14
21
(20)
13
3
31
$
$
12
18
(20)
–
4
14
[i] During the fourth quarter of 2016, the Company offered a limited lump-sum payout to certain terminated vested
plan participants on its U.S. defined benefit pension plan. Under this offer, certain participants were able to
voluntarily elect an early payout of their pension benefits, in the form of a lump-sum payment. The lump-sum
payment was equal to the present value of the participant's pension benefits. In connection with the partial
settlement, payments of $32 million were distributed from existing defined benefit pension plan assets, and the
Company recognized a $13 million non-cash settlement charge [note 4].
[ii] The asset allocation of the Company's defined benefit pension plans at December 31, 2016 and the target
allocation for 2017 is as follows:
Equity securities
Fixed income securities
Cash and cash equivalents
2017
55-75%
25-45%
0-15%
100%
2016
61%
39%
0%
100%
Substantially all of the plan assets' fair value has been determined using significant observable inputs [level 2]
from indirect market prices on regulated financial exchanges.
The expected rate of return on plan assets was determined by considering the Company's current investment mix,
the historic performance of these investment categories and expected future performance of these investment
categories.
2016 Annual Report – Financial Statements
50
[b] Termination and long service arrangements
Pursuant to labour laws and national labour agreements in certain European countries and Mexico, the Company is
obligated to provide lump sum termination payments to employees on retirement or involuntary termination, and long
service payments contingent upon persons reaching a predefined number of years of service.
The weighted average significant actuarial assumptions adopted in measuring the Company's projected termination
and long service benefit obligations and net periodic benefit cost are as follows:
Discount rate
Rate of compensation increase
Information about the Company's termination and long service arrangements is as follows:
2016
2.9%
2.7%
2015
3.1%
2.8%
2016
2015
Projected benefit obligation
Beginning of year
Current service cost
Interest cost
Actuarial losses and changes in actuarial assumptions
Benefits paid
Acquisition
Divestiture
Foreign exchange
Ending funded status
Amounts recorded in the consolidated balance sheet
Current liability
Non-current liability
Net amount
Amounts recorded in accumulated other comprehensive income
Unrecognized actuarial losses
Net periodic benefit cost
Current service cost
Interest cost
Actuarial losses
Net periodic benefit cost
[c] Retirement medical benefits plans
$ 295
20
8
15
(11)
16
–
(16)
$ 327
$
8
319
$ 327
$ 323
15
8
2
(12)
–
(4)
(37)
$ 295
$
8
287
$ 295
$ (84)
$ (69)
$
$
20
8
1
29
$
$
15
8
18
41
The Company sponsors a number of retirement medical plans which were assumed on certain acquisitions in prior
years. These plans are frozen to new employees and incur no current service costs.
In addition, the Company sponsors a retirement medical benefits plan that was amended during 2009 such that
substantially all employees retiring on or after August 1, 2009 no longer participate in the plan.
The weighted average discount rates used in measuring the Company's projected retirement medical benefit
obligations and net periodic benefit cost are as follows:
Retirement medical benefit obligations
Net periodic benefit cost
Health care cost inflation
2016
3.8%
3.9%
7.0%
2015
3.9%
3.7%
6.5%
51
MAGNA INTERNATIONAL INC.
Information about the Company's retirement medical benefits plans are as follows:
2016
2015
Projected benefit obligation
Beginning of year
Interest cost
Actuarial gains and changes in actuarial assumptions
Benefits paid
Foreign exchange
Ending funded status
Amounts recorded in the consolidated balance sheet
Current liability
Non-current liability
Net amount
Amounts recorded in accumulated other comprehensive income
Unrecognized past service costs
Unrecognized actuarial gains
Total accumulated other comprehensive income
Net periodic benefit cost
Interest cost
Past service cost amortization
Net periodic benefit cost
$ 32
1
(1)
(1)
–
$ 31
$ 2
29
$ 31
$ 1
11
$ 12
$ 1
(1)
–
$
$ 41
1
(7)
(2)
(1)
$ 32
$ 2
30
$ 32
$ 1
11
$ 12
$ 2
(1)
$ 1
The effect of a one-percentage point increase or decrease in health care trend rates would not have a significant
impact on the Company's income.
[d] Future benefit payments
Defined
benefit
pension plans
Termination
and long
service
arrangements
Retirement
medical
benefits plans
Total
Expected employer contributions - 2017
$
24
$
8
Expected benefit payments:
2017
2018
2019
2020
2021
Thereafter
$
21
21
21
23
23
133
$ 242
$
8
9
11
13
15
91
$ 147
19.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of:
Long-term portion of fair value of hedges [note 22]
Long-term portion of income taxes payable
Asset retirement obligation
Long-term lease inducements
Deferred revenue
2016 Annual Report – Financial Statements
$
$
$
$
2016
61
181
28
16
12
$ 298
2
$
34
2
2
2
2
2
9
19
$
31
32
34
38
40
233
$ 408
2015
$ 152
131
26
19
3
$ 331
52
20.
CAPITAL STOCK
[a] At December 31, 2016, the Company's authorized, issued and outstanding capital stock are as follows:
Preference shares - issuable in series -
The Company's authorized capital stock includes 99,760,000 preference shares, issuable in series. None of these
shares are currently issued or outstanding.
Common Shares -
Common Shares without par value [unlimited amount authorized] have the following attributes:
Each share is entitled to one vote per share at all meetings of shareholders.
[i]
[ii] Each share shall participate equally as to dividends.
[b] On November 10, 2016, the TSX accepted the Company's Notice of Intention to Make a Normal Course Issuer Bid
relating to the purchase for cancellation, as well as purchases to fund the Company's stock-based compensation
awards or programs and/or the Company's obligations to its deferred profit sharing plans, of up to 38 million Magna
Common Shares [the "2016 Bid"], representing approximately 10% of the Company's public float of Common Shares.
The Bid commenced on November 15, 2016 and will terminate no later than November 17, 2017.
Previously, the Company had Normal Course Issuer Bids in place for the 12 month periods beginning in
November 2015 and 2014.
The following is a summary of the Normal Course Issuer Bids [number of shares in the table below are expressed in
whole numbers]:
2014 Bid
2015 Bid
2016 Bid
Maximum
number
of shares
40,000,000
40,000,000
38,000,000
2016
2015
Shares
purchased
–
20,313,194
2,021,824
22,335,018
Cash
amount
$
–
818
86
$ 904
Shares
purchased
8,166,514
2,585,970
–
10,752,484
Cash
amount
$ 388
113
–
$ 501
Certain purchases were made by way of private agreements entered into with arm's length, third party sellers. Such
private agreement purchases were made at a discount to the prevailing market price for the Company's Common
Shares and pursuant to issuer bid exemption orders issued by the Ontario Securities Commission. All other purchases
of Common Shares are made at the market price at the time of purchase in accordance with the rules and policies of
the TSX. Purchases may also be made on the NYSE in compliance with Rule 10b-18 under the U.S. Securities
Exchange Act of 1934.
[c] The following table presents the maximum number of shares that would be outstanding if all the dilutive instruments
outstanding at March 9, 2017 were exercised or converted:
Common Shares
Stock options
382,269,005
9,258,413
391,527,418
53
MAGNA INTERNATIONAL INC.
21.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The following is a continuity schedule of accumulated other comprehensive loss:
Accumulated net unrealized loss on translation of net investment in foreign operations
Balance, beginning of year
Net unrealized loss
Repurchase of shares under normal course issuer bids [note 20]
Balance, end of year
Accumulated net unrealized loss on cash flow hedges [b]
Balance, beginning of year
Net unrealized gain (loss)
Reclassification of net loss to net income [a]
Balance, end of year
Accumulated net unrealized loss on other long-term liabilities [b]
Balance, beginning of year
Net unrealized (loss) gain
Reclassification of net loss to net income [a]
Balance, end of year
Accumulated net unrealized loss on available-for-sale investments
Balance, beginning of year
Net unrealized loss
Reclassification of net loss to net income [a]
Balance, end of year
2016
2015
$ (1,042)
(109)
20
(1,131)
$
(255)
(798)
11
(1,042)
(262)
1
126
(135)
(165)
(29)
9
(185)
(1)
–
1
–
(113)
(244)
95
(262)
(186)
14
7
(165)
(4)
3
–
(1)
Total accumulated other comprehensive loss [c]
$ (1,451)
$ (1,470)
[a] The effects on net income of amounts reclassified from AOCL, with presentation location, were as follows:
Cash flow hedges
Sales
Cost of sales
Interest
Income tax
Net of tax
Other long-term liabilities
Cost of sales
Income tax
Net of tax
2016
2015
$ (87)
(87)
–
48
(126)
1
–
1
$
(86)
(45)
(3)
39
(95)
(9)
2
(7)
Total loss reclassified to net income
$ (125)
$ (102)
[b] The amount of income tax benefit that has been allocated to each component of other comprehensive loss is
as follows:
Accumulated net unrealized loss on cash flow hedges
Balance, beginning of year
Net unrealized loss
Reclassification of net loss to net income
Balance, end of year
Accumulated net unrealized loss on other long-term liabilities
Balance, beginning of year
Net unrealized loss (gain)
Reclassification of net loss to net income
Balance, end of year
Total income tax benefit
2016
2015
$ 97
4
(48)
53
31
3
(4)
30
$
44
92
(39)
97
36
(3)
(2)
31
$ 83
$ 128
[c] The amount of other comprehensive loss that is expected to be reclassified to net income during 2017 is $130 million.
2016 Annual Report – Financial Statements
54
22.
FINANCIAL INSTRUMENTS
[a] Foreign exchange contracts
At December 31, 2016, the Company had outstanding foreign exchange forward contracts representing
commitments to buy and sell various foreign currencies. Significant commitments are as follows:
Buy
(Sell)
2017
2017
2018
2018
2019
2019
2020
2021
Buy
(Sell)
2017
2017
2018
2018
2019
2019
2020
2020
For Canadian dollars
For U.S. dollars
U.S. Weighted
average
dollar
rate
amount
Euro
amount
122
(885)
1
(597)
–
(338)
(126)
(8)
(1,831)
1.32036
0.79352
1.30509
0.78550
–
0.78407
0.76519
0.76001
23
(15)
1
(2)
–
–
–
–
7
Weighted
average
rate
1.45496
0.68983
1.44050
0.68689
–
–
–
–
Weighted
average
rate
0.05995
–
0.05194
–
0.04335
–
–
–
Peso
amount
3,500
–
1,819
–
564
–
–
–
5,883
For euros
U.S. Weighted
average
dollar
rate
amount
GBP
amount
Weighted
average
rate
Czech Weighted
average
koruna
rate
amount
115
(112)
43
(53)
24
(24)
5
(2)
(4)
0.90038
1.19637
0.87976
1.16833
0.86787
1.15362
0.86156
1.17400
1.18435
0.84126
1.17412
0.80446
–
0.80790
–
0.87553
5
(28)
1
(17)
–
(9)
–
(5)
(53)
4,084
–
2,389
–
1,167
–
165
–
7,805
0.03722
–
0.03766
–
0.03777
–
0.03802
–
Based on forward foreign exchange rates as at December 31, 2016 for contracts with similar remaining terms to
maturity, the gains and losses relating to the Company's foreign exchange forward contracts recognized in other
comprehensive income are approximately $18 million and $195 million, respectively [note 21].
The Company does not enter into foreign exchange forward contracts for speculative purposes.
55
MAGNA INTERNATIONAL INC.
[b] Financial assets and liabilities
The Company's financial assets and liabilities consist of the following:
Trading
Cash and cash equivalents
Investment in ABCP
Equity investments
Held-to-maturity investments
Severance investments
Loans and receivables
Accounts receivable
Long-term receivables included in other assets [note 14]
Other financial liabilities
Bank indebtedness
Commercial paper
Long-term debt (including portion due within one year)
Accounts payable
Derivatives designated as effective hedges, measured at fair value
Foreign currency contracts
Prepaid expenses and other
Other assets
Other accrued liabilities
Other long-term liabilities
2016
2015
$
974
60
–
$ 1,034
$ 2,863
73
4
$ 2,940
$
3
$
3
$ 6,165
229
$ 6,394
$
8
615
2,533
5,430
$ 8,586
$
12
6
(134)
(61)
$ (177)
$ 5,439
87
$ 5,526
$
25
–
2,538
4,746
$ 7,309
$
$
27
4
(191)
(152)
(312)
[c] Derivatives designated as effective hedges, measured at fair value
The Company presents derivatives that are designated as effective hedges at gross fair values in the consolidated
balance sheets. However, master netting and other similar arrangements allow net settlements under certain
conditions. The following table shows the Company's derivative foreign currency contracts at gross fair value as
reflected in the consolidated balance sheets and the unrecognized impacts of master netting arrangements:
December 31, 2016
Assets
Liabilities
December 31, 2015
Assets
Liabilities
Gross
amounts
presented
in consolidated
balance sheets
Gross
amounts
not offset
in consolidated
balance sheets
$
18
$ (195)
$
31
$ (343)
$ 17
$ (17)
$ 30
$ (30)
Net
amounts
$
1
$ (178)
$
1
$ (313)
2016 Annual Report – Financial Statements
56
[d] Fair value
The Company determined the estimated fair values of its financial instruments based on valuation methodologies it
believes are appropriate; however, considerable judgment is required to develop these estimates. Accordingly, these
estimated fair values are not necessarily indicative of the amounts the Company could realize in a current market
exchange. The estimated fair value amounts can be materially affected by the use of different assumptions or
methodologies. The methods and assumptions used to estimate the fair value of financial instruments are described
below:
Cash and cash equivalents, accounts receivable, bank indebtedness and accounts payable
Due to the short period to maturity of the instruments, the carrying values as presented in the consolidated balance
sheets are reasonable estimates of fair values.
Investments
At December 31, 2016, the Company held Canadian third party ABCP with a face value of Cdn$81 million [2015 -
Cdn$107 million]. The investment had a carrying value of Cdn$81 million [December 31, 2015 - Cdn$101 million]. At
December 31, 2016, the fair value of the ABCP was Cdn$81 million based on its maturity value in January 2017.
Commercial Paper
Due to the short period to maturity of the commercial paper, the carrying value as presented in the consolidated
balance sheet is a reasonable estimate of its fair value.
Term debt
The Company's term debt includes $139 million due within one year. Due to the short period to maturity of this debt,
the carrying value as presented in the consolidated balance sheet is a reasonable estimate of its fair value.
Senior Notes
The fair value of our Senior Notes are classified as Level 1 when we use quoted prices in active markets and Level 2
when the quoted prices are from less active markets or when other observable inputs are used to determine fair value.
At December 31, 2016, the net book value of the Company's Senior Notes was $2.30 billion and the estimated fair
value was $2.36 billion, determined primarily using active market prices.
[e] Credit risk
The Company's financial assets that are exposed to credit risk consist primarily of cash and cash equivalents, accounts
receivable, held-to-maturity investments and foreign exchange and commodity forward contracts with positive
fair values.
Cash and cash equivalents, which consist of short-term investments, are only invested in governments, bank term
deposits and bank commercial paper with an investment grade credit rating. Credit risk is further reduced by limiting
the amount which is invested in certain governments or any major financial institution.
The Company is also exposed to credit risk from the potential default by any of its counterparties on its foreign
exchange forward contracts. The Company mitigates this credit risk by dealing with counterparties who are major
financial institutions that the Company anticipates will satisfy their obligations under the contracts.
In the normal course of business, the Company is exposed to credit risk from its customers, substantially all of which
are in the automotive industry and are subject to credit risks associated with the automotive industry. For the year
ended December 31, 2016, sales to the Company's six largest customers represented 82% [2015 - 83%] of the
Company's total sales; and substantially all of its sales are to customers in which the Company has ongoing
contractual relationships.
[f] Currency risk
The Company is exposed to fluctuations in foreign exchange rates when manufacturing facilities have committed to
the delivery of products for which the selling price has been quoted in currencies other than the facilities' functional
currency, and when materials and equipment are purchased in currencies other than the facilities' functional currency.
In an effort to manage this net foreign exchange exposure, the Company employs hedging programs, primarily
through the use of foreign exchange forward contracts [note 22[a]].
57
MAGNA INTERNATIONAL INC.
[g]
Interest rate risk
The Company is not exposed to significant interest rate risk due to the short-term maturity of its monetary current
assets and current liabilities. In particular, the amount of interest income earned on cash and cash equivalents is
impacted more by investment decisions made and the demands to have available cash on hand, than by movements
in interest rates over a given period.
In addition, the Company is not exposed to interest rate risk on its term debt and Senior Notes as the interest rates on
these instruments are fixed.
23.
CONTINGENCIES
From time to time, the Company 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, the Company attempts to assess the likelihood of any adverse judgments or outcomes to these
proceedings or claims, together with potential ranges of probable costs and losses. A determination of the provision
required, if any, for these contingencies is made after analysis of each individual issue. The required provision may change
in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in
dealing with these matters.
[a]
In November 1997, the Company and two of its subsidiaries were sued by KS Centoco Ltd., an Ontario-based steering
wheel manufacturer in which the Company has a 23% equity interest, and by Centoco Holdings Limited, the owner of
the remaining 77% equity interest in KS Centoco Ltd. In March 1999, the plaintiffs were granted leave to make
substantial amendments to the original statement of claim in order to add several new defendants and claim additional
remedies and, in February 2006, the plaintiffs further amended their claim to add an additional remedy. In
February 2016, a consent order was granted allowing the Plaintiffs to file a fresh statement of claim which includes an
additional remedy and reduces certain aggravated and punitive damages claimed [the "Main Action"]. The fresh
statement of claim alleges, among other things:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
breach of fiduciary duty by the Company and two of its subsidiaries;
breach by the Company of its binding letter of intent with KS Centoco Ltd., including its covenant not to have any
interest, directly or indirectly, in any entity that carries on the airbag business in North America, other than through
MST Automotive Inc., a company to be 77% owned by Magna and 23% owned by Centoco Holdings Limited;
the plaintiff's exclusive entitlement to certain airbag technologies in North America pursuant to an exclusive
licence agreement [the "Licence Agreement"], together with an accounting of all revenues and profits resulting
from the alleged use by the Company, TRW Inc. ["TRW"] and other unrelated third party automotive supplier
defendants of such technology in North America;
inducement by the Company of a breach of the Licence Agreement by TRW;
a conspiracy by the Company, TRW and others to deprive KS Centoco Ltd. of the benefits of such airbag
technology in North America and to cause Centoco Holdings Limited to sell to TRW its interest in KS Centoco Ltd.
in conjunction with the Company's sale to TRW of its interest in MST Automotive GmbH and TEMIC Bayern-
Chemie Airbag GmbH; and
(cid:127)
oppression by the defendants.
The plaintiffs are seeking, among other things, damages of approximately Cdn$2.56 billion in the Main Action.
Document production, completion of undertakings and examinations for discovery are substantially complete,
although limited additional examinations for discovery are expected to occur.
In April 2016, the Company filed a new claim against Centoco Holdings Limited and KS Centoco Ltd. seeking an order
under the Ontario Business Corporations Act to wind-up the business and affairs of KS Centoco Ltd. and distribute its
assets to the shareholders [the "Wind-Up Action"]. In June 2016, Centoco Holdings Limited and KS Centoco Ltd. filed a
statement of defence and counterclaim in the Wind-Up Action alleging breach of fiduciary duty and bad faith
performance of contractual obligations by the Company and two of its officers who were the Company's
representatives on KS Centoco Ltd.'s Board of Directors for a number of years [the "Centoco Counterclaim"]. Pursuant
to the Centoco Counterclaim, Centoco Holdings Limited and KS Centoco Ltd. are claiming damages of approximately
Cdn$1.8 billion.
2016 Annual Report – Financial Statements
58
Both actions will be tried together at a trial scheduled to commence on October 30, 2017. The claims and damages in
the Centoco Counterclaim substantially duplicate those described in the Main Action and, as a result, the Company
believes that there is no incremental liability due to the Centoco Counterclaim. The Company also believes it has valid
defences to the claims made by Centoco Holdings Limited and KS Centoco Ltd. in both actions and therefore intends
to continue to vigorously defend these two cases. Due to the nature of the claims made and potential damages
alleged by Centoco Holdings Limited and KS Centoco Ltd., the Company is unable to predict the final outcome of
these claims.
[b]
In September 2014, the Conselho Administrativo de Defesa Economica, Brazil's Federal competition authority,
attended at one of the Company's operating divisions in Brazil to obtain information in connection with an ongoing
antitrust investigation relating to suppliers of automotive door latches and related products.
Proceedings of this nature can often continue for several years. Where wrongful conduct is found, the relevant
antitrust authority can, depending on the jurisdiction, initiate administrative or criminal legal proceedings and impose
administrative or criminal fines or penalties taking into account several mitigating and aggravating factors. At this time,
management is unable to predict the duration or outcome of the Brazilian investigation, including whether any
operating divisions of the Company will be found liable for any violation of law or the extent or magnitude of any
liability, if found to be liable.
The Company's policy is to comply with all applicable laws, including antitrust and competition laws. The Company
previously initiated a global review focused on antitrust risk led by a team of external counsel. If any antitrust violation
is found as a result of such review, a regulatory investigation or otherwise, Magna could be subject to fines, penalties,
restitution settlements and civil, administrative or criminal legal proceedings and other consequences, including
reputational damage.
[c]
In certain circumstances, the Company is at risk for warranty costs including product liability and recall costs. Due to
the nature of the costs, the Company makes its best estimate of the expected future costs [note 16]; however, the
ultimate amount of such costs could be materially different. The Company continues to experience increased
customer pressure to assume greater warranty responsibility. Currently, under most customer agreements, the
Company only accounts for existing or probable claims. Under certain complete vehicle engineering and assembly
contracts, and with respect to our powertrain systems programs, the Company records an estimate of future
warranty-related costs based on the terms of the specific customer agreements, and the specific customer's [or the
Company's] warranty experience.
24.
SEGMENTED INFORMATION
[a] Magna is a global automotive supplier which has complete vehicle engineering and contract manufacturing expertise,
as well as product capabilities which include body, chassis, exterior, seating, powertrain, active driver assistance,
vision, closure and roof systems. Magna has electronic and software capabilities across many of these areas.
Magna's success is directly dependent upon the levels of North American and European [and currently to a lesser
extent on Asia and Rest of World] car and light truck production by its customers. OEM production volumes in each of
North America and Europe may be impacted by a number of geographic factors, including general economic
conditions, interest rates, consumer credit availability, fuel prices and availability, infrastructure, legislative changes,
environmental emission and safety issues, and labour and/or trade relations.
Given the differences between the regions in which the Company operates, Magna's operations are segmented on a
geographic basis. The Company's segments consist of North America, Europe, Asia and Rest of World. The Company
maintains management teams in each of the Company's two primary markets, North America and Europe. The role of
the North American and European management teams is to manage Magna's interests to ensure a coordinated effort
across the Company's different product capabilities. In addition to maintaining key customer, supplier and government
contacts in their respective markets, the regional management teams centrally manage key aspects of the Company's
operations while permitting the divisions enough flexibility through Magna's decentralized structure to foster an
entrepreneurial environment.
Consistent with the above, the Company's 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
the long-term strategic direction and future global growth in the Company.
The Company's chief operating decision maker uses Adjusted EBIT as the measure of segment profit or loss, since
management believes Adjusted EBIT is the most appropriate measure of operational profitability or loss for its
reporting segments. Adjusted EBIT is calculated by taking net income from continuing operations and adding back
income taxes, interest expense, net, and other expense (income), net.
The accounting policies of each segment are the same as those set out under "Significant Accounting Policies" [note 1]
and intersegment sales and transfers are accounted for at fair market value.
59
MAGNA INTERNATIONAL INC.
The following tables show certain information with respect to segment disclosures:
Total
sales
External
sales
Depreciation
and
amortization
Adjusted
EBIT [ii]
Goodwill
Fixed
asset
additions
Fixed
assets,
net
2016
North America
Canada
United States
Mexico
Eliminations
North America
Europe
Western Europe
(excluding Great Britain)
Great Britain
Eastern Europe
Eliminations
Europe
Asia
Rest of World
Corporate and Other [i]
Total reportable segments
Current assets
Investments, intangible
assets, goodwill, deferred
tax assets and other
assets
Consolidated total assets
North America
Canada
United States
Mexico
Eliminations
North America
Europe
Western Europe
(excluding Great Britain)
Great Britain
Eastern Europe
Eliminations
Europe
Asia
Rest of World
Corporate and Other [i]
Total reportable segments
Current assets
Investments, intangible
assets, goodwill, deferred
tax assets, and other
assets
Consolidated total assets
$
$
6,784
10,226
5,121
(1,387)
20,744
10,537
658
2,285
(400)
13,080
2,674
465
(518)
36,445
$
$
6,214
9,857
4,586
–
20,657
10,159
656
2,000
–
12,815
2,502
464
7
36,445
$
486
$
2,061
$
595
431
103
13
23
1,056
$
543
266
(17)
45
2,898
$
1,116
212
–
–
1,923
$
Total
sales
External
sales
Depreciation
and
amortization
Adjusted
EBIT [ii]
Goodwill
2015
$ 6,329
9,603
4,261
(1,178)
19,015
8,936
404
2,110
(327)
11,123
1,981
461
(446)
$ 32,134
$ 5,856
9,183
3,869
–
18,908
8,635
404
1,873
–
10,912
1,846
461
7
$ 32,134
$ 411
$ 1,934
$
590
276
77
17
21
$ 802
451
149
(25)
20
$ 2,529
525
229
–
–
$ 1,344
$
$
201 $
400
309
–
910
721
1,573
999
–
3,293
578
24
136
–
738
97
11
51
1,807 $
1,912
127
545
–
2,584
679
62
404
7,022
10,163
5,381
22,566
$
Fixed
asset
additions
Fixed
assets,
net
$
242
421
233
–
896
$
645
1,422
755
–
2,822
357
26
112
–
495
121
15
64
$ 1,591
1,263
145
471
–
1,879
811
51
385
$ 5,948
11,144
2,595
$ 19,687
[i]
Included in Corporate and Other Adjusted EBIT are intercompany fees charged to the automotive segments.
[ii] The following table reconciles Net income from continuing operations to Adjusted EBIT:
Net Income from continuing operations
Add (deduct):
Interest expense, net
Other expense (income), net
Income taxes
Adjusted EBIT
2016
2015
$ 2,074
$ 1,940
88
30
706
$ 2,898
44
(166)
711
$ 2,529
2016 Annual Report – Financial Statements
60
[b] The following table aggregates external revenues by customer as follows:
General Motors
Ford Motor Company
Fiat / Chrysler Group
Daimler AG
BMW
Volkswagen
Other
2016
2015
$ 7,207
5,667
5,349
4,294
3,786
3,758
6,384
$ 36,445
$ 6,424
4,923
5,094
3,779
3,300
3,301
5,313
$ 32,134
[c] The following table summarizes external revenues generated by automotive products and services:
Body systems and chassis systems
Powertrain systems
Exterior systems
Seating systems
Tooling, engineering and other
Vision and electronic systems
Closure systems
Complete vehicle assembly
2016
2015
$ 9,157
6,489
5,272
5,079
3,078
2,768
2,412
2,190
$ 36,445
$ 7,790
4,755
5,155
4,497
2,700
2,583
2,297
2,357
$ 32,134
MAGNA INTERNATIONAL INC.
Supplementary Financial and Share Information
FINANCIAL SUMMARY
(US dollars in millions, except per share figures)
(unaudited)
Years ended December 31,
Total sales
Depreciation and amortization
Net income attributable to Magna International Inc. from continuing operations
36,445
1,056
2,031
32,134
802
1,946
34,403
845
1,924
32,538
1,019
1,530
30,837
801
1,433
Diluted earnings per Common share from continuing operations
Weighted average number of Common shares outstanding - Diluted
5.16
393.2
4.72
412.7
4.44
433.2
3.31
461.6
3.05
470.4
2016
2015
2014
2013
2012
Cash dividends paid per share
Cash flow from operations
Capital expenditures
Working capital
Fixed assets, net
Total assets
Long-term debt
Shareholders' equity
Long-term debt to equity ratio
1.00
0.88
0.76
0.64
0.55
3,386
1,807
2,332
1,591
2,822
1,495
2,502
1,094
2,206
1,274
1,468
7,022
22,566
2,394
10,219
0.23:1
3,868
5,948
19,687
2,327
9,117
0.26:1
2,236
5,402
18,068
806
8,673
0.09:1
2,613
5,189
18,024
102
9,639
0.01:1
2,451
5,273
17,109
112
9,458
0.01:1
All amounts are from continuing operations except the 2012 figures which have not been restated to reflect discontinued operations.
61
MAGNA INTERNATIONAL INC.
Share Information
The Common Shares are listed and traded in Canada on the Toronto Stock Exchange ("TSX") under the stock symbol "MG" and in the
United States on the New York Stock Exchange ("NYSE") under the stock symbol "MGA". As of February 28, 2017, there were
1,392 registered holders of Common Shares.
Distribution of Shares held by Registered Shareholders
Canada
United States
Other
Dividends
Common Shares
80.67%
19.26%
0.07%
Dividends for 2016 on Magna's Common Shares were paid on each of March 24, June 10, September 9 and December 9 at a rate of
U.S.$0.25. Magna's dividends have been designated as "eligible dividends" as defined in subsection 89(1) of the Income Tax Act
(Canada) and, accordingly, are eligible for an enhanced tax credit. Additional details are found on Magna's website
(www.magna.com), under "Investors – Shareholder Information – Dividends & Interest".
Price Range of Shares
The following table sets forth, for the years indicated, the high and low sales prices and volumes of Common Shares traded in each
case as reported by the TSX and NYSE, respectively.
Common Shares (TSX) (Cdn$)
Stock Symbol "MG"
Quarter
1st
2nd
3rd
4th
Year ended December 31, 2016
Year ended December 31, 2015
Volume
88,185,636
65,765,778
57,439,425
63,141,400
High
56.47
56.12
56.73
62.10
Low
42.09
43.42
42.73
49.44
Volume
34,520,227
58,550,351
73,070,176
69,201,347
High
69.71*
74.24
74.50
71.10
Common Shares (NYSE) (US$)
Stock Symbol "MGA"
Quarter
1st
2nd
3rd
4th
Year ended December 31, 2016
Year ended December 31, 2015
Volume
164,022,753
101,867,032
88,253,874
88,039,428
High
40.94
42.73
41.36
44.20
Low
34.04
37.08
36.13
39.08
Volume
45,981,685
88,723,846
114,082,297
114,739,117
High
55.61*
59.42
57.62
53.89
* Price adjusted to reflect a two-for-one stock split implemented on March 25, 2015
Low
64.62
60.80
56.49
55.96
Low
45.28
50.33
42.77
40.31
2016 Annual Report – Financial Statements
62
(This page has been left blank intentionally.)
Corporate
Directory
Directors
William L. Young (Chairman of the Board)
Scott B. Bonham
Peter G. Bowie
Hon. J. Trevor Eyton
Lady Barbara Judge
Dr. Kurt J. Lauk
Cynthia A. Niekamp
Dr. Indira V. Samarasekera
Donald J. Walker
Lawrence D. Worrall
Corporate Office
Magna International Inc.
337 Magna Drive
Aurora, Ontario
Canada L4G 7K1
Telephone: (905) 726-2462
magna.com
Transfer Agent and Registrar
Computershare Trust Company of Canada
100 University Avenue, 8th Floor
Toronto, Ontario, Canada M5J 2Y1
Telephone: 1 (800) 564-6253
Computershare Trust Company N.A.
250 Royall Street
Canton, MA, USA 02021
Telephone: (781) 575-3120
Toll Free: 1 (800) 962-4294
www.computershare.com
Marc J. Neeb
Executive Vice-President and
Chief Human Resources Officer
James J. Tobin, Sr.
Chief Marketing Officer
and President, Magna Asia
Tommy J. Skudutis
Chief Operating Officer, Exteriors,
Seating, Mirrors, Closures
and Cosma
Frank C. Seguin
Executive Vice-President,
Corporate Projects and
Strategy Development
Executive Officers
Donald J. Walker
Chief Executive Officer
Vincent J. Galifi
Executive Vice-President
and Chief Financial Officer
Jeffrey O. Palmer
Executive Vice-President
and Chief Legal Officer
Guenther Apfalter
President, Magna Europe
Seetarama Kotagiri
Executive Vice-President,
Chief Technology Officer
and President, Magna Electronics
Exchange Listings
Common Shares
Toronto Stock Exchange MG
New York Stock Exchange MGA
As a ''foreign private issuer'' listed on the New York Stock Exchange (NYSE), Magna is required to disclose the significant ways in which its corporate
governance practices differ from those to be followed by U.S. domestic issuers under the NYSE listing standards. Please see the corporate governance
section of our website (www.magna.com) for our Statement of Significant Corporate Governance Differences (NYSE). Additionally, please refer to
the Management Information Circular/Proxy Statement for our 2017 Annual Meeting of Shareholders for a description of our corporate governance
practices in comparison with the requirements and guidelines of the Canadian Securities Administrators.
Shareholders wishing to communicate with the non-management members of the Magna Board of Directors may do so by contacting the Chairman
of the Board through the office of Magna's Corporate Secretary at 337 Magna Drive, Aurora, Ontario, Canada L4G 7K1 (905) 726-7070.
Shareholders wishing to obtain a copy of Magna's Notice of Intention to Make a Normal Course Issuer Bid, referred to in Note 20 to the consolidated
financial statements contained in this Annual Report, may do so by contacting Magna's Corporate Secretary.
The 2017 Annual Meeting of Shareholders
The 2017 Annual Meeting of Shareholders will be held at Hilton Toronto/Markham Suites Conference Centre, 8500 Warden Avenue, Markham, Ontario,
Canada on Thursday, May 11, 2017 commencing at 10:00 a.m. (Eastern Daylight Time).
2016 Annual Report
Additional copies of this 2016 Annual Report or copies of our quarterly reports may be obtained from: The Corporate Secretary, Magna International Inc.,
337 Magna Drive, Aurora, Ontario, Canada L4G 7K1 or 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. 2017. Magna and the logo are registered trademarks of Magna International Inc.
X
2/3 X
1/4 X
2/3 X
X
2/3 X
1/4 X
2/3 X
MAGNA INTERNATIONAL INC.
337 Magna Drive
Aurora, Ontario, Canada L4G 7K1
Telephone: +1 905 726 2462
magna.com
CONNECT WITH MAGNA
Driving the
Future of Mobility
X
2016 Annual Report
2/3 X
1/4 X
2/3 X