Magna Q4 earnings plummet

Magna International Inc. reported an 80 percent decline in fourth-quarter profits as North America's largest parts supplier struggled with higher costs related to electrification and its advanced driver-assistance business, as well as volatility in new-vehicle production.

The company reported net income of $95 million in the quarter ended Dec. 31, down from $464 million a year earlier. The sharp decline comes even as quarterly sales revenue rose 5 percent to $9.57 billion.

"In 2023, we are highly focused on improving underperforming operations, limiting discretionary costs and securing further inflation recoveries from our customers," Magna CEO Swamy Kotagiri said in a news release. "At the same time, we continue to invest to support the significant amount of business growth in front of us."

For the full year, Magna reported net income of $592 million, down 61 percent from the $1.51 billion it made in 2021. Sales revenue rose 4.4 percent to $37.84 billion in that time frame.

Magna shares closed down 16 percent Friday, at $54.13.

The quarterly and annual earnings drops for Magna, the world's fourth-largest supplier by annual sales to automakers, reflect the broader financial struggles parts suppliers have faced during the last year. The microchip shortage, inflation, higher labor and energy costs, geopolitical uncertainty and lower new-vehicle production have put the squeeze on suppliers' margins, even as automakers largely continue to report healthy profits.

Magna blamed its fourth-quarter income plunge on higher engineering costs in its electrification and advanced driver assistance systems businesses, as well as higher warranty costs, rising launch costs and operating inefficiencies at a factory in Europe.

Volatility in new-vehicle production has been a major drag on Magna’s business, Kotagiri said on a Friday call with analysts and investors. He said some parts programs with major automakers had volumes between 50 and 60 percent of the original, contracted plan, sending production schedules for a loop.

“That is a significant hit in terms of managing labor and looking at our overall cost structure,” Kotagiri said.
Inflation, higher commodity costs and spiking energy prices in Europe are also weighing the company down, he said.

“It’s a complex situation that we’re trying to solve,” Kotagiri said.

Revenue in North America rose to $4.7 billion in the fourth quarter from $4.2 billion a year earlier. Sales were flat in Europe ($3.7 billion) and Asia ($1.2 billion), while revenue from other regions in the world rose to $123 million from $100 million a year prior.

Sales in the company's body exteriors and structures unit rose 11 percent from a year earlier to $4 billion. Adjusted earnings before interest and taxes in that unit rose 18 percent to $198 million. It was the only Magna business unit to report higher adjusted EBIT than a year before.

The company reported an 8 percent rise in power and vision unit sales to $3.02 billion, while adjusted EBIT fell 36 percent to $109 million. Seating systems sales rose 4 percent to $1.35 billion, as adjusted EBIT plummeted 73 percent to $13 million.

Sales gains in those units were partially offset by a decrease in business from Magna's complete vehicle assembly unit. Magna built about 27,000 vehicles for automakers in the fourth quarter, down from 32,700 a year earlier. Sales revenue dropped 12 percent to $1.33 billion in that time, as adjusted EBIT plunged 42 percent to $57 million. Magna pinned lower earnings from the unit on higher energy and labor costs and fewer government incentives available to it.

As Magna transitions its complete vehicle business to electric, next-generation vehicles such as the Fisker Ocean SUV, it expects sales volume to continue declining. The supplier expects sales of between $4.9 billion and $5.2 billion from the business in 2023, and between $4 billion and $4.5 billion in 2025. Increased input costs, high labor and energy costs and costs related to engineering programs are expected to weigh down the unit in 2023, CFO Pat McCann said on the call.

Sales from the company’s other units are expected to grow at a compounded annual rate of between 6 and 10 percent from 2022 to 2025.

Magna expects a bounce-back year in 2023. Its outlook includes projected net income of $1.1 billion to $1.4 billion on sales revenue of $39.6 billion to $41.2 billion.

The company expects 2023 quarterly earnings to be the lowest in the first quarter, which Magna anticipates coming in below fourth-quarter 2022 levels, McCann said. Earnings are then expected to “improve sequentially” as the year progresses.

Magna expects new program launches and higher light-vehicle production to boost its business in 2023.

The company expects 14.9 million units to be built in North America in 2023, up from 14.3 million in 2022, with a similar, modest gain in vehicle production in Europe.

But vehicle production is expected to remain volatile as automakers sort through the microchip shortage.

Other headwinds Magna expects for 2023 include high labor and energy costs, as well as high interest rates and inflation negatively impacting new-vehicle demand.

“Our No. 1 priority in 2023 is operational excellence to improve margins and returns,” Kotagiri said.

The company’s 2023 outlook does not include the impact of its $1.5-billion acquisition of Veoneer Active Safety, which is expected to close later this year. Magna previously said Veoneer Active Safety sales would reach $1.9 billion by 2024, from about $1.1 billion in 2022.

The unit is expected to be “close to break-even” in 2023, reaching a break-even level in 2024, McCann said.

Magna ranks No. 4 on the Automotive News list of the top 100 global suppliers, with worldwide parts sales to automakers of $36.2 billion in 2021.