/FIRST AND FINAL ADD - TO117 - Intier Automotive Inc. earnings/
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 This Management's Discussion and Analysis of the
Results of Operations and Financial Condition ("MD&A") for the
three and nine month periods ended September 30, 2004 was prepared
as of November 2, 2004 and should be read in conjunction with the
accompanying unaudited interim Consolidated Financial Statements
for the three and nine month periods ended September 30, 2004 and
the audited Consolidated Financial Statements and MD&A of
Intier Automotive Inc. (the "Company") for the year ended December
31, 2003, as included in the 2003 Annual Report to Shareholders.
This Management's Discussion and Analysis discusses results of
operations from continuing operations unless otherwise noted (see
Note 5 "Discontinued Operations" in the accompanying September 30,
2004 unaudited interim Consolidated Financial Statements). All
amounts in this MD&A are in U.S. dollars unless otherwise
noted. OVERVIEW The Company is a global full service supplier of
automotive interior and closure components, systems and modules
whose principal products include interior systems, such as seating
systems, cockpit systems, sidewall systems, cargo management
systems and overhead, floor and acoustic systems and related
components; and closure systems, including latching systems, glass
moving systems, power sliding doors and liftgates, mid-door and
tailgate modules, wiper systems and door modules. The Company
directly supplies most of the major automobile manufacturers in the
world. The Company's operations consist of two business segments,
Interior and Closure businesses, which are generally aligned on a
product basis with the corresponding purchasing and engineering
groups of the Company's customers. For the three month period ended
September 30, 2004, the Company's Interior segment accounted for
approximately 79% and 72% of the Company's consolidated sales and
operating income, the Company's Closure segment accounted for
approximately 21% and 31% of the Company's consolidated sales and
operating income. Corporate costs reduced the Company's
consolidated operating income by approximately 3%. The following
are the highlights of the Company's financial performance for the
third quarter of 2004: - Total sales increased 22% to $1,272
million compared to $1,039 million for the third quarter of 2003. -
Average dollar content on North American produced vehicles in the
third quarter of 2004 increased by $53 to $215 as compared to $162
in the third quarter of 2003. Western European average dollar
content per vehicle increased by $13 to $106 in the third quarter
of 2004, compared to $93 in the third quarter of 2003. The growth
in content in North America and Europe was primarily attributable
to increased market penetration and the positive impact of the
strengthening average foreign exchange rates between the primary
currencies in which the Company conducts business; the euro,
British Pound and Canadian dollar, and the U.S. dollar; the
Company's reporting currency. - New products launched during the
third quarter of 2004 included the interior integration, overhead
system, instrument panel and door panels for the Cadillac STS and
complete seats for the Mercury Mariner in North America. - North
American light vehicle production was approximately 3.6 million
units; representing a 1% decrease from the third quarter of 2003,
and Western European vehicle production increased approximately 2%
to 3.7 million units compared to the third quarter of 2003. -
Operating income increased by $30.6 million to $48.2 million from
$17.6 million in the third quarter of 2003. - Diluted earning per
share from continuing operations increased to $0.45 in the third
quarter of 2004 compared to $0.12 in the second quarter of 2003. -
On October 25, 2004, Magna International Inc. ("Magna") announced a
proposal to acquire all of the outstanding Class A Subordinate
Voting Shares of Intier not owned by Magna by way of a
court-approved plan of arrangement under Ontario law. In addition
to court approval and Intier Board of Directors approval, the
transaction requires the approval of the Class A Subordinate Voting
shareholders of Intier, by way of a majority of the votes cast by
holders other than Magna and its affiliates and other insiders. On
November 2, 2004, Intier's Board of Directors established a Special
Committee of independent Directors consisting of Lawrence Worrall
(Chairman) and Neil Davis to consider and make recommendations to
the Intier Board regarding Magna's proposal. Industry Risks and
Trends The following is a summary of some of the more significant
risks and trends in the automotive industry that could affect the
Company's financial results: - An economic downturn could reduce or
eliminate the Company's profitability. The global automotive
industry is cyclical and is sensitive to changes in economic
conditions such as interest rates, consumer demand, commodity
prices and international conflicts; - Increasing price reduction
pressures from the Customer could reduce sales and profit margins;
- The Company's profitability is directly affected by increasing
raw material costs, particularly steel and resin, whose higher
prices are reflective of global supply and demand issues; - The
Company is under increasing pressure to absorb more costs related
to product design and engineering and tooling as well as other
items previously paid for directly by automobile manufacturers that
could reduce profit margins; - Shift in market share among vehicles
could have an adverse effect on the Company's sales and profit
margins; - The Company's profitability is affected by movements of
the U.S. dollar against the Canadian dollar, the British Pound, the
euro and other currencies in which the Company generates revenues;
- The Company is under increasing pressure to move operations to
lower cost jurisdictions like Mexico, China and Eastern Europe. The
impact to the Company could include higher costs associated with
the impairment of redundant assets and labour in certain higher
cost jurisdictions in which the Company currently carries on
business, relocation and start-up costs, all of which would
adversely impact profit in the short term; and - The Company's
customers are increasingly requesting that each of their suppliers
bear the cost of the repair and replacement of defective products
which are either covered under automobile manufacturer's warranty
or are the subject of a recall by the customer and which were
improperly designed, manufactured or assembled by their suppliers.
The Company is also subject to the risk of exposure to product
liability and economic loss based class action claims in the event
that the failure of the Company's products results in bodily
injury, property damage and/or economic losses to the end use
consumer. RESULTS OF OPERATIONS Impact of Foreign Currency
Translation Three month periods ended Nine month periods ended
September 30, September 30,
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2004 2003 Change 2004 2003 Change
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1 Canadian dollar equals U.S. dollars 0.7663 0.7245 5.8% 0.7532
0.7012 7.4% 1 euro equals U.S. dollars 1.2227 1.1244 8.7% 1.2255
1.1121 10.2% 1 British Pound equals U.S. dollars 1.8164 1.6087
12.9% 1.8212 1.6105 13.1%
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The Company's reported financial results of operations are directly
affected by the average exchange rate used to translate the results
of its operations having a functional currency other than the U.S.
dollar into U.S. dollars. The preceding table reflects the average
foreign exchange rates between the primary currencies in which the
Company conducts business and the Company's U.S. dollar reporting
currency. These exchange rates have been used to translate the
results of foreign operations into U.S. dollars. Throughout this
MD&A, reference is made to the impact of foreign exchange on
reported U.S. dollar amounts where relevant. Three Month Periods
Ended September 30, 2004 and 2003 Sales (in millions, except
average dollar content per vehicle) Three month periods ended
September 30, 2004 2003
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Vehicle production volumes North America 3.6 3.7 Europe 3.7 3.6
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Average dollar content per vehicle North America $ 215 $ 162 Europe
$ 106 $ 93
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Production sales - Interior Systems North America $ 575.2 $ 415.4
Europe 344.5 299.7 Production sales - Closure Systems 257.9 216.4
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1,177.6 931.5 Tooling and engineering sales 94.5 107.7
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Total sales $ 1,272.1 $ 1,039.2
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Average dollar content per vehicle in North America and in Europe
has been calculated by dividing the Company's North American and
European production sales by the industry's North American and
western European light vehicle production volumes, respectively for
each period indicated. Production Sales - Interior Systems: North
America: North American production sales for the Interior business
increased 38.5% to $575.2 million for the third quarter of 2004
compared to $415.4 million for the third quarter of 2003. This
growth was primarily attributable to an increase in average dollar
content per vehicle. The increase in average dollar content per
vehicle was attributable to new products launched during 2004
including the interior integration, overhead system, instrument
panel and door panels for the Cadillac STS; the complete seats for
the Mercury Mariner; the complete seats, headliner and instrument
panel for the Chevrolet Equinox and the second and third row stow
in floor seats for the DaimlerChrysler minivans and also to new
products launched during the second half of 2003 including the
complete seats, overhead system and interior trim for the Ford
Freestar and Mercury Monterey; the integration of the complete
interior, excluding seats for the Cadillac SRX; the seat mechanisms
for the Honda Accord and Pilot; the door panels for the Chevrolet
Malibu; and the cockpit module and seat tracks for the Chevrolet
Colorado and the GMC Canyon. The increase in production sales was
also attributable to the strengthening of the Canadian dollar
relative to the U.S. dollar. Europe: European production sales for
the Interior business increased 14.9% to $344.5 million for the
third quarter of 2004 compared to $299.7 million for the third
quarter of 2003. This growth was primarily due to the strengthening
of the British Pound and euro relative to the U.S. dollar. New
products launched during 2004 including the door panels for the BMW
1 Series; and the door panels, interior trim, carpet and cargo
management system for the Mercedes A-Class; and new products
launched in the second half of 2003, including the instrument
panel, console, door panels and other interior trim for the BMW 6
Series, the cargo management and other interior trim for the BMW X3
and the complete seats for the VW Caddy also contributed to the
increased sales. Production Sales - Closure Systems: Production
sales for the Closure business increased 19.2% to $257.9 million
for the third quarter of 2004 compared to $216.4 million for the
third quarter of 2003. This growth was attributable to an increase
in average dollar content per vehicle as a result of the launch of
a number of new products including a modular side door latch for a
number of Audi programs and to the strengthening of the euro and
the Canadian dollar relative to the U.S. dollar. Tooling and
Engineering Sales: The Company's consolidated tooling and
engineering sales for the third quarter of 2004 decreased by $13.2
million to $94.5 million from $107.7 million for the third quarter
of 2003 due to a lower number of new product launches during the
third quarter of 2004 compared to the third quarter of 2003.
Tooling and engineering sales decreased by $13.5 million to $85.8
million in the Interior business, while tooling and engineering
sales increased by $0.3 million to $8.7 million in the Closure
business for the third quarter of 2004 compared to the third
quarter of 2003. Gross Margin Three month periods ended September
30, 2004 2003
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Gross margin $ 158.0 $ 115.7
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Gross margin as a percentage of total sales 12.4% 11.1%
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Gross margin increased by $42.3 million to $158.0 million in the
third quarter of 2004 compared to $115.7 million in the third
quarter of 2003. As a percentage of total sales, gross margin
increased to 12.4% for the third quarter of 2004 compared to 11.1%
for the comparable quarter of 2003. This increase is a result of
sales from new products launched during 2004 and the second half of
2003, lower launch costs associated with new products and new
facilities as compared to the third quarter of 2003, operating
improvements at certain divisions, and the strengthening of the
British Pound, Canadian dollar and euro relative to the U.S.
dollar. These increases have been partially offset by increased raw
material prices and operating inefficiencies at certain divisions.
Operating Income Three month periods ended September 30, 2004 2003
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Gross margin $ 158.0 $ 115.7 Less: Depreciation and amortization
28.8 26.2 Selling, general and administrative 64.6 57.0 Affiliation
and social fees 16.4 14.9
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Operating income $ 48.2 $ 17.6
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Depreciation and amortization as a percentage of total sales 2.3%
2.5%
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Selling, general and administrative expenses as a percentage of
total sales 5.1% 5.5%
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Depreciation and amortization: Depreciation and amortization
expense increased by $2.6 million to $28.8 million for the third
quarter of 2004 from $26.2 million for the third quarter of 2003.
$3.7 million of the increase was primarily due to additional
depreciation expense as a result of the Company's continuing
investment in capital equipment to support new programs and
facilities and the strengthening of the British Pound, Canadian
dollar, and euro relative to the U.S. dollar. This increase was
partially offset by $1.1 million of lower depreciation expense
primarily associated with facilities that were closed since the
third quarter of 2003. Selling, general and administrative:
Selling, general and administrative ("SG&A") costs increased by
$7.6 million to $64.6 million for the third quarter of 2004 from
$57.0 million for the third quarter of 2003. $8.6 million of the
increase in SG&A expense was associated with the growth in
sales from new products and the strengthening of the Canadian
dollar, British Pound and euro relative to the U.S. dollar. This
increase was partially offset by approximately $1.0 million of
lower SG&A costs as a result of the closure of facilities since
the third quarter of 2003. Affiliation and social fees: The Company
pays fees to Magna for certain rights provided under the terms of
the Company's affiliation agreements and contributes a portion of
its social commitment obligation under its Corporate Constitution
pursuant to a social commitment agreement with Magna. These fees
and social commitment contributions are based on the Company's
sales and pretax profits. The fees and contributions to Magna
expensed during the third quarter of 2004 were $16.4 million
reflecting an increase of $1.5 million compared to $14.9 million
expensed in the third quarter of 2003. The increase in fees is
reflective of the increase in sales and pretax profits in the third
quarter of 2004 compared to the third quarter of 2003. Operating
Income: Three month periods ended September 30, 2004 2003
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Interior Systems North America $ 32.8 $ 13.0 Europe 1.9 1.3 Closure
Systems 15.0 3.1 Corporate (1.5) 0.2
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Operating income $ 48.2 $ 17.6
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Operating Income - Interior Systems: North America: Operating
income for the North American Interior business increased by $19.8
million to $32.8 million for the third quarter of 2004 from $13.0
million for the third quarter of 2003. Operating income was
positively impacted by $22.0 million primarily as a result of
increased sales from new products launched, lower costs associated
with fewer launches of new products and new facilities offset by
increased raw material prices and by a $3.0 million improvement in
operating income at a previous underperforming division. These
increases have been partially offset by a $3.4 million increase in
SG&A costs and affiliation fees associated with the growth in
sales and by a $1.8 million increase in depreciation and
amortization expense resulting from the Company's continuing
investment in capital equipment to support new production programs
and facilities. Europe: Operating income for the European Interior
business increased $0.6 million to $1.9 million for the third
quarter of 2004 from $1.3 million for the third quarter of 2003.
The increase is a result of increased sales from new products
launched offset by increased costs associated with the launch of
new products at one particular division. Operating Income - Closure
Systems: Operating income for the Closure business increased by
$11.9 million to $15.0 million for the third quarter of 2004 from
$3.1 million for the third quarter of 2003. Operating income was
positively impacted by $11.1 million primarily as a result of
increased sales from new products and lower costs resulting from
the closure of a manufacturing facility in Europe during the first
quarter of 2004 offset by increased raw material prices and by a
$3.4 million operating income improvement at a previous
underperforming division. These increases were also offset by a
$1.9 million increase in SG&A costs and affiliation fees
associated with the increase in sales and a $0.7 million increase
in depreciation and amortization resulting from the Company's
continuing investment in capital equipment to support new
production programs and facilities. Operating Income - Corporate:
Operating loss for corporate for the third quarter of 2004 was $1.5
million compared to operating income of $0.2 million for the
comparable period in the prior year. Other Items Three month
periods ended September 30, 2004 2003
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Operating income $ 48.2 $ 17.6 Interest expense, net - 0.3
Amortization of discount on Convertible Series Preferred Shares 1.6
3.1 Equity loss 0.1 0.3
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Income before income taxes and minority interest 46.5 13.9 Income
taxes 19.2 7.9 Minority interest (0.1) (0.1)
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Net income from continuing operations 27.4 6.1 Net loss (income)
from discontinued operations 5.8 (2.0)
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Net income 21.6 8.1 Financing charge on Convertible Series
Preferred Shares 1.5 0.3
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Net income attributable to Class A Subordinate Voting and Class B
Shares $ 20.1 $ 7.8
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Interest expense, net: The Company's net interest expense for the
third quarter of 2004 was nil representing a $0.3 million reduction
compared to the third quarter of 2003, primarily due to interest
income earned on higher cash balances. Amortization of discount on
Convertible Series Preferred Shares: As part of the reorganization
of the Company in August 2001, $225 million of Convertible Series
Preferred Shares were issued to Magna. As a result, a $1.6 million
charge relating to the Company's amortization of the discount on
the Convertible Series Preferred Shares classified as debt was
incurred during the third quarter of 2004 compared to $3.1 million
in the third quarter of 2003. The decrease in amortization of
discount on Convertible Series Preferred Shares is reflective of
the Series 1 Convertible Preferred Shares being fully amortized at
December 31, 2003. Income taxes: The effective tax rate on income
before income taxes and minority interest was 41% for the third
quarter of 2004 compared to 57% for the third quarter of 2003.
Excluding the impact of losses not benefited, the non-deductible
amortization of discount on Convertible Series Preferred Shares and
a $2.3 million valuation allowance for future taxes recorded in the
third quarter of 2004, the effective tax rate was approximately 30%
for the third quarter of 2004 as compared to 27% for the third
quarter of 2003. Net income from continuing operations: Net income
from continuing operations for the third quarter of 2004 was $27.4
million compared to $6.1 million for the third quarter of 2003. The
increase was attributable to increased operating income resulting
primarily from increased sales from new products launched during
the first nine months of 2004 and the second half of 2003, lower
costs associated with fewer launches of new products and new
facilities, operating income improvements at certain previously
underperforming divisions, and lower amortization of discount on
Convertible Series Preferred Shares. These improvements were
partially offset by increased raw material prices, increased
SG&A costs and affiliation fees associated with the increase in
sales, increased depreciation and amortization expense resulting
from the Company's continuing investment in capital equipment to
support new production programs and facilities, increased costs
associated with the launch of new products at one particular
division in Europe and increased income tax expense. Net loss from
discontinued operations: Net loss from discontinued operations for
the third quarter of 2004 relates to the sale of a manufacturing
facility during the third quarter of 2004 that was formerly
reported in the European Interior Systems segment. As required by
the Canadian Institute of Chartered Accountants Handbook Section
3475 "Disposal of Long-Lived Assets and Discontinued Operations",
the results of the discontinued operations have been segregated
from the results of continuing operations. Net income from
discontinued operations for the third quarter of 2003 includes the
results of operations of two separate manufacturing facilities sold
during 2004; the first sale occurred during the first quarter of
2004 and the second sale occurred during the third quarter of 2004.
For the third quarter of 2003, the Company incurred a combined net
income from discontinued operations of $2.0 million on $29.9
million of combined sales. For the full year of 2003, the impact of
both discontinued operations was a net income of $4.8 million on
$130.5 million of combined sales. Financing Charge: The deduction
from net income of dividends declared and paid on the Convertible
Series Preferred Shares (net of return of capital) was $1.5 million
for the third quarter of 2004 compared to $0.3 million for third
quarter of 2003. The increase is a result of the dividend equity
component of the Series 1 Convertible Preferred Shares being fully
utilized. Earnings Per Share Three month periods ended September
30, 2004 2003
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Earnings per Class A Subordinate Voting or Class B Share from
continuing operations Basic $ 0.52 $ 0.12 Diluted $ 0.45 $ 0.12
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Earnings per Class A Subordinate Voting or Class B Share Basic $
0.40 $ 0.16 Diluted $ 0.36 $ 0.16
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Average number of Class A Subordinate Voting and Class B Shares
outstanding (in millions) Basic 49.9 48.8 Diluted 65.0 48.8
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Diluted earnings per Class A Subordinate Voting or Class B Share
from continuing operations for the third quarter of 2004 was $0.45
compared to $0.12 for the third quarter of 2003. The increase in
diluted earnings per Class A Subordinate Voting or Class B Share
from continuing operations is a result of higher net income for the
third quarter of 2004 compared to the third quarter of 2003. The
impact of discontinued operations on diluted earnings per Class A
Subordinate Voting or Class B Share for the third quarters of 2004
and 2003 was a reduction of $0.09 and an increase of $0.04,
respectively. The 2003 full year impact of discontinued operations
on diluted earnings per share was an increase of $0.07. During the
third quarter of 2004, the Company issued 162,012 Class A
Subordinate Voting Shares to the Intier Employee Equity and Profit
Participation Program. The remaining increase in the average number
of Class A Subordinate Voting and Class B Shares outstanding
relates to the exercise of stock options granted under the
Company's Incentive Stock Option Plan. Overview of Nine Month
Periods Ended September 30, 2004 and 2003 Sales (in millions,
except average dollar content per vehicle) Nine month periods ended
September 30, 2004 2003
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Vehicle production volumes North America 11.9 12.0 Europe 12.5 12.3
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Average dollar content per vehicle North America $ 214 $ 151 Europe
$ 98 $ 85
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Production sales - Interior Systems North America $ 1,880.0 $
1,251.1 Europe 1,062.5 917.8 Production sales - Closure Systems
833.7 679.0
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3,776.2 2,847.9
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Tooling and engineering sales 259.2 290.1
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Total sales $ 4,035.4 $ 3,138.0
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Average dollar content per vehicle in North America and in Europe
has been calculated by dividing the Company's North American and
European production sales by the industry's North American and
western European light vehicle production volumes, respectively for
each period indicated. Production Sales - Interior Systems: North
America: North American production sales for the Interior business
increased 50.3% to $1,880.0 million for the nine months of 2004
compared to $1,251.1 million for the first nine months of 2003.
This growth was due to an increase in average dollar content per
vehicle and to the strengthening of the Canadian dollar relative to
the U.S. dollar. The increase in average dollar content per vehicle
was attributable to new products launched during 2004 including the
interior integration, overhead system, instrument panel and door
panels for the Cadillac STS; the complete seats for the Mercury
Mariner; the complete seats, headliner and instrument panel for the
Chevrolet Equinox; the second and third row stow in floor seats for
the DaimlerChrysler minivans and to new products launched during
the second half of 2003 including the complete seats, overhead
system and interior trim for the Ford Freestar and Mercury
Monterey; the integration of the complete interior, excluding
seats, for the Cadillac SRX; the seat mechanisms for the Honda
Accord and Pilot; the door panels for the Chevrolet Malibu and the
cockpit module and seat tracks for the Chevrolet Colorado and the
GMC Canyon. Europe: European production sales for the Interior
business increased 15.8% to $1,062.5 million for the first nine
months of 2004 compared to $917.8 million for the first nine months
of 2003. This growth was primarily due to the strengthening of the
British Pound and euro relative to the U.S. dollar. New products
launched during 2004, including the door panels for the BMW 1
Series; and the door panels, interior trim, carpet and cargo
management system for the Mercedes A-Class and new products
launched during the second half of 2003 including the instrument
panel, console, door panels and other interior trim for the BMW 6
Series, the cargo management and other interior trim for the BMW X3
and the complete seats for the VW Caddy, also contributed to the
increased sales. Production Sales - Closure Systems: Production
sales for the Closure business increased 22.8% to $833.7 million
for the first nine months of 2004 from $679.0 million for the first
nine months of 2003. The increase in production sales was primarily
due to the increase in average dollar content per vehicle for the
nine month period ended September 30, 2003, which is primarily a
result of the launch of a modular side door latch for a number of
Audi Programs and the strengthening of the euro and Canadian dollar
relative to the U.S. dollar. Tooling and Engineering Sales: The
Company's consolidated tooling and engineering sales for the first
nine months of 2004 decreased 10.7% to $259.2 million compared to
$290.1 million for the first nine months of 2003 due to a lower
number of new product launches during the first nine months of 2004
compared to the first nine months of 2003. Tooling and engineering
sales decreased by $16.3 million to $236.0 million in the Interior
business and decreased by $14.6 million to $23.2 million in the
Closure business for the first nine months of 2004. Operating
Income Nine month periods ended September 30, 2004 2003
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Interior Systems North America $ 131.6 $ 48.5 Europe (4.6) 0.8
Closure Systems 49.1 34.8 Corporate (0.8) 0.8
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Operating Income $ 175.3 $ 84.9
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Operating Income - Interior Systems: North America: Operating
income for the North American Interior business increased by $83.1
million to $131.6 million for the first nine months of 2004 from
$48.5 million for the first nine months of 2003. Operating income
was positively impacted by $98.1 million primarily as a result of
increased sales from new product launches, increased sales on
certain high content programs, lower costs associated with fewer
launches of new products and new facilities offset by increased raw
material prices, and by a $13.1 million improvement in operating
income at a previous underperforming division and $3.5 million of
incremental investment tax credits. These increases have been
partially offset by $23.8 million of increased SG&A costs and
affiliation fees associated with the increase in sales and by $7.8
million of increased depreciation and amortization expense
resulting from the Company's continuing investment in capital
equipment to support new production programs and facilities.
Europe: Operating income for the European Interior business
decreased by $5.4 million to an operating loss of $4.6 million for
the first nine months of 2004 from operating income of $0.8 million
for the first nine months of 2003. The decrease is primarily
attributable to a $4.0 million charge relating to the writedown of
inventory at two reorganized facilities. Operating Income - Closure
Systems: Operating income for the Closure business increased by
$14.3 million to $49.1 million in the first nine months of 2004
from $34.8 million in the first nine months of 2003. Operating
income was positively impacted by $12.7 million primarily as a
result of increased sales from new products; the strengthening of
the euro and Canadian dollar offset by increased raw material
prices; by a $9.4 million operating income improvement at a
previous underperforming division and by $1.4 million of
incremental investment tax credits. These increases were partially
offset by a $2.5 million charge for severance and termination costs
related to the closure of a division, $5.5 million of increased
SG&A costs and affiliation fees associated with the increase in
sales and by $1.2 million of increased depreciation and
amortization expense resulting from the Company's continuing
investment in capital equipment to support new production programs
and facilities. Operating Loss - Corporate: Operating loss for
corporate for the first nine months of 2004 was $0.8 million
compared to operating income of $0.8 million for the comparable
period in the prior year. FINANCIAL CONDITION, LIQUIDITY AND
CAPITAL RESOURCES Three Month Periods Ended September 30, 2004 and
2003 Operating Activities Three month periods ended September 30,
2004 2003
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Net income from continuing operations $ 27.4 $ 6.1 Items not
involving current cash flows 33.8 28.4
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61.2 34.5 Change in non-cash working capital (57.7) (90.7)
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$ 3.5 $ (56.2)
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During the third quarter of 2004, cash from operations before
changes in working capital increased by $26.7 million to $61.2
million from $34.5 million for the third quarter of 2003. The
increase was a result of a $21.3 million increase in net income
from continuing operations and a $5.4 million increase in non-cash
items due primarily to higher depreciation and future tax expense.
The $57.7 million of cash invested in working capital during the
third quarter of 2004 is the result of a $50.7 million decrease in
accounts payable and accrued liabilities, a $38.4 million increase
in inventories, and a $4.6 million increase in other working
capital, offset by a $36.0 million decrease in accounts receivable.
Investment Activities Three month periods ended September 30, 2004
2003
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Capital asset additions $ (21.4) $ (29.7) Investments and other
asset additions (4.5) (5.4) Proceeds from disposition of capital
assets and other 0.4 0.1 Discontinued operations (15.9) (5.7)
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$ (41.4) $ (40.7)
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Cash used for capital assets, investment and other asset spending
was $25.9 million for the third quarter of 2004 compared to $35.1
million for the third quarter of 2003. This use of funds was
partially offset by cash received from normal course capital asset
and other asset dispositions of $0.4 million and $0.1 million for
the third quarters of 2004 and 2003, respectively. Cash used for
funding and disposal of discontinued operations was $15.9 million
for the third quarter of 2004 compared to cash used for funding of
discontinued operations of $5.7 million for the third quarter of
2003. Financing Activities Three month periods ended September 30,
2004 2003
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Increase in bank indebtedness $ 22.9 $ 57.5 Net repayments of
long-term debt and other long-term liabilities (2.5) (1.5) Issue of
Class A Subordinate Voting Shares 3.1 1.4 Dividends on Class A
Subordinate Voting and Class B Shares (5.1) (5.0) Dividends on
Convertible Series Preferred Shares (2.9) (2.8)
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$ 15.5 $ 49.6
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Cash generated from financing activities was $15.5 million for the
third quarter of 2004 compared to $49.6 million for the third
quarter of 2003. Cash generated from financing activities for the
third quarter of 2004 included net issuances of debt (including
bank indebtedness, long-term debt and other long-term liabilities)
of $20.4 million compared to $56.0 million for the third quarter of
2003. Dividends paid during the third quarters of 2004 and 2003
were $0.10 per Class A Subordinate Voting and Class B Share
totalling $5.1 million and $5.0 million, respectively. Dividends
paid on Convertible Series Preferred Shares for the third quarters
of 2004 and 2003 were $2.9 million and $2.8 million, respectively.
During the third quarter of 2004, 162,012 Class A Subordinate
Voting Shares were issued to the Intier Employee Equity and Profit
Participation Program for total proceeds of $2.9 million compared
to 88,147 Class A Subordinate Voting Shares issued during the third
quarter of 2003 for total proceeds of $1.4 million. The remainder
of the proceeds from the issue of Class A Subordinate Voting Shares
for the third quarter of 2004 relate to the exercise of options
granted under the Company's Incentive Stock Option Plan. Nine Month
Periods Ended September 30, 2004 and 2003 Operating Activities Nine
month periods ended September 30, 2004 2003
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Net income from continuing operations $ 99.1 $ 37.3 Items not
involving current cash flows 117.1 95.8
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216.2 133.1 Change in non-cash working capital (41.6) (97.1)
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$ 174.6 $ 36.0
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During the first nine months of 2004, cash generated from
operations before changes in working capital increased by $83.1
million to $216.2 million from $133.1 million for the first nine
months of 2003. The increase was a result of an increase in net
income from continuing operations of $61.8 million as well as an
increase in non-cash items of $21.3 million due primarily to higher
depreciation and future tax expense. The $41.6 million of cash
invested in working capital during the first nine months of 2004 is
a result of a $91.6 million increase in accounts receivable, a
$29.5 million increase in inventories and a $7.3 million increase
in other working capital, offset by a $86.8 million increase in
accounts payable and accrued liabilities. The increase in accounts
receivable and accounts payable and accrued liabilities is
primarily due to increased sales from new programs launched since
the third quarter of 2003. Investment Activities Nine month periods
ended September 30, 2004 2003
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Capital asset additions $ (74.0) $ (86.8) Investment and other
asset additions (13.1) (10.5) Proceeds from disposition of capital
assets and other 1.2 0.2 Discontinued operations (19.8) (1.1)
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$ (105.7) $ (98.2)
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Cash used for investment activities during the first nine months of
2004 increased to $105.7 million compared to $98.2 million during
the first nine months of 2003. Cash used for capital and other
asset spending was $87.1 million and $97.3 million for the first
nine months of 2004 and 2003, respectively. This use of funds was
partially offset by cash received from normal course capital asset
and other asset dispositions of $1.2 million and $0.2 million
during the first nine months of 2004 and 2003, respectively. Cash
used for funding and disposal of discontinued operations was $19.8
million for the nine months ended September 30, 2004 compared to
cash used for funding of discontinued operations of $1.1 million
for the nine months ended September 30, 2003. Financing Activities
Nine month periods ended September 30, 2004 2003
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Increase in bank indebtedness $ 29.1 $ 29.9 Net repayments of
long-term debt and other long-term liabilities (6.5) (4.2) Issue of
Class A Subordinate Voting Shares 11.6 7.9 Dividends on Class A
Subordinate Voting and Class B Shares (15.0) (12.4) Dividends on
Convertible Series Preferred Shares (8.4) (8.4)
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$ 10.8 $ 12.8
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Cash used in financing activities was $10.8 million for the first
nine months of 2004 compared to $12.8 million for the first nine
months of 2003. Cash used in financing activities for the first
nine months of 2004 included net issuances of debt (including bank
indebtedness, long-term debt and other long-term liabilities) of
$22.6 million compared to $25.7 million for the first nine months
of 2003. Dividends paid during the first nine months of 2004 were
$0.30 per Class A Subordinate Voting and Class B Share totalling
$15.0 million compared to $0.25 per Class A Subordinate Voting and
Class B Share during the first nine months of 2003, totalling $12.4
million. Dividends paid on Convertible Series Preferred Shares for
the first nine months of 2004 and 2003 were $8.4 million. During
the first nine months of 2004, 617,253 Class A Subordinate Voting
Shares were issued to the Intier Employee Equity and Profit
Participation Program for total proceeds of $10.7 million compared
to 558,562 Class A Subordinate Voting Shares issued in the first
half of 2003 for total proceeds of $7.9 million. The remainder of
the proceeds from the issue of Class A Subordinate Voting Shares
for the first nine months of 2004 relate to the exercise of options
granted under the Company's Incentive Stock Option Plan.
Consolidated Capitalization The Company's net debt (including bank
indebtedness, long-term debt including current portion, and the
liability portion of the Convertible Series Preferred Shares, less
cash and cash equivalents) to total capitalization (including net
debt and shareholders' equity), was 1.2% at September 30, 2004
compared to net debt to total capitalization of 7.6% at December
31, 2003. The above total capitalization figures treat the
liability portion ($216.6 million and $214.7 million as at
September 30, 2004 and December 31, 2003, respectively) of the
Convertible Series Preferred Shares as debt. The Series 1
Convertible Preferred Shares are retractable by Magna on or after
December 31, 2003 and the Series 2 Convertible Preferred Shares are
retractable by Magna on or after December 31, 2004. These
instruments are also convertible into Intier Class A Subordinate
Voting Shares at a fixed conversion price of U.S.$15.09 per Class A
Subordinate Voting Share. Unused and Available Financing Resources
During the quarter ended September 30, 2004, the Company renewed
its unsecured, revolving term credit facility on terms similar to
its previous facility, bearing interest at variable rates not
exceeding the prime rate of interest. The credit facility contains
similar negative and affirmative financial and operating covenants
and events of default customary for credit facilities of this
nature, including requirements that the Company maintain certain
financial ratios and restrictions on its ability to incur or
guarantee additional indebtedness or to dispose of assets as well
as the right of lenders to declare all outstanding indebtedness to
be immediately due and payable upon the occurrence of an event of
default. In addition to the North American tranche, which is now
$365.0 million, the new facility also includes a (euro) 100.0
million European tranche. The facility was renewed for an
additional 3 years and expires on September 16, 2007. Cash on hand
increased to $298.4 million at September 30, 2004 from $216.7
million at December 31, 2003. At September 30, 2004, the Company
had credit facilities of $536.3 million, of which $437.6 million
are unused and available. $427.4 million of the unused and
available facilities represent the unused and available portion of
the Company's $365 million and (euro) 100 million three year
revolving credit facility that expires September 16, 2007. In
addition to the above unused and available financing resources, the
Company and certain of its North American subsidiaries sponsored a
tooling finance program for tooling suppliers to finance tooling
under construction. Under this program, the facility provider
ordered tooling from tooling suppliers and will subsequently sell
such tooling to the sponsor or its designee. The facility provider
made, and continues to make on previously ordered tooling, advances
to tooling suppliers based on tool build milestones approved by the
sponsor or its designee. On completion of the tooling, the facility
provider will sell the tooling to the sponsor or its designee for
an amount equal to cumulative advances including carrying costs. In
the event of tooling supplier default, the sponsor will purchase in
progress tooling for an amount approximating cumulative advances.
As at September 30, 2004, $22.3 million had been advanced to
tooling suppliers under the Company's portion of this facility.
This amount is included in accounts payable on the Company's
September 30, 2004 unaudited Consolidated Balance Sheet. Subsequent
to September 30, 2004, the Company sponsored a European tool
supplier finance program, which allows suppliers to sell their
existing Intier commitments to a financial institution on
pre-established terms and conditions. The terms and conditions of
these Intier commitments are not affected by the suppliers'
decision to hold or sell the receivable to the financial
institution, and as such, the amounts owing under this program will
continue to be recorded as accounts payable. The Company typically
receives a contract or production purchase order from an automobile
manufacturer to produce a component, assembly, module or system for
one or more vehicle model years. As part of these contracts, the
Company may be required to absorb costs relating to product design
and engineering and tooling costs and recover these costs by
increasing the unit price of the related products. If estimated
production volumes are not achieved, the Company may not fully
recover these costs. It is expected that the Company will continue
to incur increasing amounts of design and engineering and tooling
costs, primarily related to newly awarded production contracts with
production planned to start during the remainder of 2004 through to
2006. Capital and investment spending for existing businesses and
projects is expected to range between $110 million and $125 million
for 2004. The majority of capital spending in 2004 relates to the
award of new production contracts and includes spending for new
machinery and equipment, new production facilities, maintenance
improvements and planned efficiency enhancements. Management
believes the Company is in a position to meet all 2004 planned cash
requirements from its cash balances on hand and cash provided from
operations. A decrease in estimated vehicle production volumes
could adversely impact cash provided from operating activities in
2004. Cash provided from operating activities totalled $174.6
million and $36.0 million for the nine month periods ended
September 2004 and 2003, respectively. Off Balance Sheet Financing
During the second quarter of 2004, the Company entered into an
operating lease agreement for vehicle parts tooling. The lease
facility requires lease payments for tooling costs, which
approximated $10.0 million be made monthly over the lease term
expiring January 2008. The lease commenced when all tooling costs
were funded on June 18, 2004. Guarantees The Company has guarantees
to third parties that include future rent, utility costs, workers
compensation claims under development, commitments linked to
maintaining specific employment, customs duties and obligations
linked to performance of specific vehicle programs. The amount of
these guarantees is not individually or in aggregate significant.
Contingencies The Company has recently been named with Ford Motor
Company and the Company's sister affiliate Magna Donnelly as a
defendant in class action proceedings in the Ontario Superior Court
of Justice as well as state courts in North Carolina and Florida as
a result of its role as a supplier to Ford of door latches, and in
certain cases door latch assemblies, for the Ford F-150, F-250,
Expedition, Lincoln Navigator and Blackwood vehicles produced by
Ford between November 1995 and April 2000. Other class proceedings
in Massachusetts and other states are anticipated. In these
proceedings, plaintiffs are seeking compensatory damages (in an
amount to cover the cost of repairing the vehicles as well to
reimburse owners of the vehicles for their alleged diminution in
value), punitive damages, attorney fees and interest. Each of the
class actions have similar claims and allege that the door latch
systems are defective and do not comply with applicable motor
vehicle safety legislation and that the defendants conspired to
hide the alleged defects from the end use consumer. These class
proceedings are in the very early stages and have not been
certified by any court. The Company denies these allegations and
intends to vigorously defend the lawsuits, including taking steps
to consolidate the state class proceedings to federal court
whenever possible. Given the early stages of the proceedings, it is
not possible to predict their outcome. On June 10, 2004, the
Company was served with a statement of claim issued in the Ontario
Superior Court of Justice by C-MAC Invotronics Inc., a subsidiary
of Solectron Corporation. The plaintiff is a supplier of
electro-mechanical and electronic automotive parts and components
to the Company. The Statement of claim alleges, among other things:
- improper use by the Company of the plaintiff's confidential
information and technology in order to design and manufacture
certain automotive parts and components; and - breach of contract
related to a failure by the Company to fulfill certain preferred
sourcing obligations arising under a strategic alliance agreement
signed by the parties at the time of the Company's disposition of
the Invotronic's business division to the plaintiff in September,
2000. The plaintiffs are seeking, among other things, compensatory
damages in the amount of Cdn. $150 million and punitive damages in
the amount of Cdn. $10 million. Despite the early stages of the
litigation, the Company believes it has valid defenses to the
plaintiffs' claims and therefore intends to defend this case
vigorously. In the ordinary course of business activities, the
Company may be contingently liable for litigation and claims with
customers, suppliers and former employees and for environmental
remediation costs. Management believes that adequate provisions
have been recorded in the accounts where required. Although it is
not possible to estimate the extent of potential costs and losses,
if any, management believes, but can provide no assurance that the
ultimate resolution of such contingencies would not have a material
adverse effect on the financial position and results of operations
of the Company. Please refer to Note 22 "Contingencies" in the 2003
audited Consolidated Financial Statements included in the Company's
2003 Annual Report to Shareholders. The Company has a number of
arrangements in Canada, the United States, the United Kingdom and
Europe which provide pension and future employee benefits to its
retired and current employees. Pension arrangements include
statutory pension plans as well as similar arrangements, which
provide pension benefits as required by statute. The Company has
obligations under its defined benefit pension plans and other
statutory plans. Unfunded unrecognized net actuarial gains and
losses are amortized and charged to earnings over the average
remaining service period of active employees. All pension plans and
similar arrangements are funded to the minimum legal funding
requirement. In certain plans, there is no legal requirement to
fund the obligation until such time as they are actually incurred
and as a result these arrangements are unfunded. In the event that
any of these plans are terminated or wound up, an immediate payment
of all unfunded amounts may be required and these amounts could
materially exceed the current unfunded position. ACCOUNTING CHANGES
Asset Retirement Obligations Effective January 1, 2004, the Company
adopted the Canadian Institute of Chartered Accountants ("CICA")
Handbook Section 3110, "Asset Retirement Obligations", which
establishes standards for the recognition, measurement and
disclosure of asset retirement obligations and the related asset
retirement costs. The Company has adopted this section
retroactively and as such, the financial statements of the prior
period have been adjusted accordingly. The retroactive changes to
the Consolidated Balance Sheet at December 31, 2003 are as follows:
Capital assets $ 6.1
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$ 6.1
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Other long-term liabilities $ 11.6 Future tax liabilities (1.0)
Retained earnings (3.7) Currency translation (0.8)
-------------------------------------------------------------------------
$ 6.1
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Net income for the three and nine month periods ended September 30,
2003 was reduced by $0.2 million and $0.7 million respectively. The
change had no impact on basic and diluted earnings per share for
the three month period ended September 30, 2003. Basic and diluted
earnings per share for the nine month period ended September 30,
2003 were reduced by $0.01. Revenue Arrangements with Multiple
Deliverables The Company adopted CICA Emerging Issues Committee
Abstract No. 142, "Revenue Arrangements with Multiple Deliverables"
("EIC-142") prospectively for new revenue arrangements with
multiple deliverables entered into by the Company on or after
January 1, 2004. The Company enters into such multiple element
arrangements where it has separately priced tooling contracts that
are entered into at the same time as contracts for subsequent parts
production or vehicle assembly. EIC-142 addresses how a vendor
determines whether an arrangement involving multiple deliverables
contains more than one unit of accounting and also addresses how
consideration should be measured and allocated to the separate
units of accounting in the arrangement. Separately priced tooling
can be accounted for as a separate revenue element only in
circumstances where the tooling has value to the customer on a
stand-alone basis and there is objective and reliable evidence of
the fair value of the subsequent parts production or vehicle
assembly. The adoption of EIC-142 did not have a material effect on
the Company's revenue or earnings for the three and nine month
periods ended September 30, 2004. Stock-Based Compensation In
accordance with the CICA amended Handbook Section 3870 "Stock-Based
Compensation and other Stock-Based Payments" ("CICA 3870"),
effective January 1, 2003, the Company prospectively adopted
without restatement of any comparable period the fair value method
for recognizing compensation expense for fixed price stock options.
As a result, during the three and nine month periods ended
September 30, 2004, the Company recognized compensation expense of
$0.1 million and $0.4 million respectively. There was no
compensation expense recognized during the three and nine month
periods ended September 30, 2003. Subsequent Events On October 25,
2004, Magna International Inc. ("Magna") announced a proposal to
acquire all of the outstanding Class A Subordinate Voting Shares of
Intier not owned by Magna by way of a court-approved plan of
arrangement under Ontario law. In addition to court approval and
Intier Board of Directors approval, the transaction requires the
approval of the Class A Subordinate Voting shareholders of Intier,
by way of a majority of the votes cast by holders other than Magna
and its affiliates and other insiders. On November 2, 2004,
Intier's Board of Directors established a Special Committee of
independent Directors consisting of Lawrence Worrall (Chairman) and
Neil Davis to consider and make recommendations to the Intier Board
regarding Magna's proposal. Following receipt of the Special
Committee's recommendations, the Intier Board will respond to
Magna's proposal. Additional Information Additional information
relating to the Company, including the Company's Annual Information
Form is available on SEDAR at http://www.sedar.com/. END FIRST AND
FINAL ADD DATASOURCE: Intier Automotive Inc. CONTACT: PRNewswire --
Nov. 2
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