Magna International Profit Drops 28% on Slumping Auto Sales

Automakers are cutting production as auto sales slide.

John Rosevear
John Rosevear
Aug 8, 2019 at 5:05PM
Industrials

Canadian auto-industry supplier Magna International (NYSE:MGA) said on Aug. 8 that its second-quarter net income fell 28% from a year ago, to $452 million, on weaker results for most of its core business segments.

That result was still good enough to beat expectations. Excluding one-time items, Magna earned $1.59 per share, ahead of the consensus Wall Street estimate of $1.54 as reported by Thomson Reuters. Revenue of $10.13 billion beat Wall Street's estimate of $9.95 billion.

Magna's shares rose over 4% in early trading after the news was released.

The raw numbers

Note that while Magna is a Canadian company, it reports its financial results in U.S. dollars:

Metric Q2 2019 Change vs. Q2 2018
Revenue $10.13 billion (1%)
Adjusted EBIT* $677 million (16%)
Adjusted EBIT margin* 6.7% (1.1 pp)
Net income $452 million (27.8%)
Adjusted earnings per share* $1.59 (5%)

"EBIT" = earnings before interest and tax."Pp" = percentage points. Data source: Magna International, Inc.
* "Adjusted" figures exclude the effects of one-time items. Magna took one-time charges of $68 million in the second quarter of 2019, most related to restructuring costs and noncash investment revaluations; it took $39 million in one-time credits in the year-ago period.

What happened at Magna in the second quarter?

  • Magna announced a new joint venture with Chinese automaker BAIC Motor Corporation (OTC: BMCLF). The two will collaborate on a new factory in China that will build electric vehicles -- including, possibly, contract manufacturing for other automakers. The new venture complements an existing joint venture between the two that is focused on engineering new electric vehicles.
  • Revenue in the body exteriors and structures segment fell 7% to $4.2 billion, on lower global production of light vehicles and unfavorable exchange-rate movements. Automakers have reduced production in slowing regional markets, particularly China and (to a lesser extent) North America. The segment's adjusted EBIT margin fell to 8% from 8.5% in the year-ago period.
  • Revenue in the power and vision segment fell 12% to $2.8 billion, again on lower global vehicle production and exchange rates, as well as higher spending on new products related to electric vehicles and self-driving. The segment's new program launches include three important new BMW SUVs and General Motors' Chevrolet Blazer. Adjusted EBIT margin fell to 7.2% from 9.4% a year ago.
  • Revenue in the seating segment rose 2% from a year ago, to $1.5 billion. Here, the effects of new product launches, including the BMW SUVs and a new vehicle by Chinese automaker Geely, more than offset the production decline and currency effects. But the segment's adjusted EBIT margin fell to 5.7% from 8.2% a year ago, as new-product launch costs and higher commodity prices weighed on profit.
  • Revenue in the "complete vehicles" segment (contract manufacturing for automakers) rose 41% to $1.8 billion, as production volumes increased 28% to about 43,000. Adjusted EBIT margin rose to 2.4% from just 0.1% a year prior.
  • Magna generated $511 million in free cash flow in the quarter, and returned $519 million to shareholders via an ongoing share-repurchase program ($409 million) and the regular quarterly dividend ($110 million).
Magna and BAIC executives are shown shaking hands in front of a banner with the two companies' logos and text in both English and Chinese.

Magna and Chinese automaker BAIC agreed to jointly manufacture electric vehicles in China. Image source: Magna International.

What Magna's CEO had to say

CEO Don Walker was upbeat, noting that the company's 1% year-over-year decline in revenue outpaced the auto industry's global 6% year-over-year decline in production. But he noted that Magna is clear-eyed about the near-term prospects for the industry.

"We have been taking steps to optimize our business in response to lower industry volumes," Walker said in a statement. "Our 2019 outlook is largely unchanged despite our expectation of continued challenging automotive market conditions."

Looking ahead

Magna did trim its full-year revenue and margin expectations slightly from the guidance it gave in May. It now expects:

  • Revenue between $38.9 billion and $41.1 billion (prior guidance: between $39.1 billion and 41.3 billion; 2018 result: $40.8 billion)
  • EBIT margin between 6.6% and 6.9% (prior guidance: between 6.7% and 7%; 2018: 7.6%)
  • Net income between $1.9 billion and $2.1 billion, unchanged from prior guidance (2018: $3.0 billion)