Martinrea International Inc.
TSX : MRE

Martinrea International Inc.

November 09, 2006 16:05 ET

Martinrea International Inc. Releases September 30, 2006 Third Quarter Results Record Revenues and Earnings

TORONTO, ONTARIO--(CCNMatthews - Nov. 9, 2006) - Martinrea International Inc. (TSX:MRE), a leader in the production of quality metal parts, assemblies and modules and fluid management systems focused primarily on the automotive sector, announced today the release of its financial results for the third quarter ended September 30, 2006.

Revenues for the quarter ended September 30, 2006 totaled $174.1 million as compared to $161.4 million for the quarter ended September 30, 2005. Revenues for the quarter ended September 30, 2006 have increased from the prior year comparables primarily due to the launch of several new programs such as the new metallic gas tank for the Ford Fusion AWD that launched during the third quarter of 2006 (which is in addition to the new metallic gas tank for the Ford Fusion that launched in August 2005), brake lines for GM's SUV line, the hydroformed engine cradle and metallic assemblies for the Buick Lucerne (launched August 2005) and the Cadillac DTS (launched October 2005) with full volumes materializing in January 2006, metallic take-over programs, and the inclusion of the revenues of the Company's new metal forming facility, Rollstar Metal Forming in Brampton, Ontario, acquired in May 2006. The increase in revenues from new programs was offset by the appreciation of the Canadian dollar versus the U.S. dollar resulting in a reduction in the translation of U.S. dollar denominated revenues of approximately $6.0 million. Incremental production sales were also offset by customer pricing pressures that continue to be a normal part of the North American automotive parts industry. Production revenues are expected to continue to rise as new programs mature and launches are completed.

The Company's revenues for the third quarter of 2006 of $174.1 million were lower than revenues in the second quarter of 2006 of $204.3 million primarily due to the reduction of revenue of the traditional July shut-down period, reductions of customer vehicle production in the third quarter relative to the second quarter and lower tooling sales. This decrease was partially offset by the inclusion of the revenues of Rollstar Metal Forming acquired in May 2006 and take-over business.

Gross margin percentage for the quarter ended September 30, 2006 was 18.0% as compared to 16.7% in the third quarter of 2005. Gross margin percentage for the quarter ended September 30, 2006 has increased in comparison to the prior year third quarter due to the closure of an unprofitable plant in the Netherlands in the fourth quarter of 2005, divisional reorganizations of two Canadian plants that were undertaken in 2005, ongoing cost reduction plans and the successful launching of new programs this year that have helped to fill available capacity. These improvements have helped offset margin erosion from contractual price reductions with customers and higher costs for materials such as steel which are not on customer resale programs.

Gross margin percentage for the third quarter of 2006 of 18.0% has decreased in comparison to the second quarter of 2006 of 18.9% primarily due to the reduction of revenue of the traditional July shut-down period and customer volume reductions, offset by a change in product mix quarter over quarter and the continued emphasis on productivity improvements within the Company.

Net earnings for the quarter ended September 30, 2006 were approximately $7.5 million as compared to $4.6 million for the quarter ended September 30, 2005. The increase in net earnings from the prior year quarter comparable is primarily attributable to increased revenues, improved gross margin reflecting better utilization of the Company's assets and the successful launching of several new programs. In the quarter, the net effect of one-time items was nil. These one-time items include a gain on the disposition of part of the Company's share investment in Hy-Drive Technologies Ltd. in the amount of $1.6 million and a $1.4 million gain on the sale of the Company's facility in the Netherlands (this division was closed by the Company in the fourth quarter of 2005). These amounts were offset by a capital impairment charge of $3.3 million, discussed below. In April 2006, the Company issued six million shares as part of a public offering. Excluding the effect of this share issuance both basic and diluted earnings per share would have been $0.13 for the quarter. The Company anticipates that the share issuance will increase shareholder value over time by providing the Company with the ability to move quickly on opportunities to purchase new facilities or equipment, where these assets provide a strategic fit with the Company's objective of prudent but profitable growth.

Net earnings of $7.5 million and diluted earnings per share of $0.12 for the third quarter of 2006 decreased as compared to net earnings of $11.9 million and diluted earnings per share of $0.19 for the second quarter of 2006. This decrease is primarily due to the reduction of revenue related to the traditional July shut-down period and reductions of customer vehicle production in the third quarter relative to the second quarter.

Amortization expense was $10.7 million for the quarter ended September 30, 2006 as compared to $7.2 million for the quarter ended September 30, 2005. Amortization expense for the quarter ended September 30, 2006 is higher than the quarter ended September 30, 2005 due to the amortization of capital assets previously purchased that are now production ready, the amortization relating to Rollstar Metal Forming acquired in May 2006 and the write-down of approximately $3.3 million in capital assets. The write-down relates primarily to the impairment of the land and building of one of the Company's facilities that will be rationalized as part of the Company's plan to maximize capacity at existing facilities. As such, the Company determined that an impairment charge was appropriate. This facility is in addition to the facility rationalization announced in the second quarter of 2006. The impairment charge was determined by comparing the carrying amount of the land and building to its fair value. The fair value of the land and building was determined via reference to quoted market prices. In the absence of the impairment charge, amortization expense would have been $7.4 million.

Amortization expense for the quarter ended September 30, 2006 is higher than amortization expense for the second quarter of 2006 of $10.1 million due to the impairment of capital assets, noted above, and the inclusion of Rollstar Metal Forming effective May 12, 2006. This was partially offset by the impairment charge taken in the second quarter of 2006 for the land and building of the Company's Bishop Circle Assembly division, which the Company has decided to sell in order to move into a larger facility that will accommodate the organic growth of this division.

Selling, general and administrative expenses for the quarter ended September 30, 2006 were $ 11.7 million, or 6.7% of revenues, as compared to $10.9 million, or 6.8% of revenues for the quarter ended September 30, 2005. Selling, general and administrative expenses for the quarter ended September 30, 2006 increased compared to the prior year comparable due to seasonal expense reductions.

On a percentage basis, the decrease in the percentage for the third quarter ended 2006 versus the prior year comparable is primarily due to the increase in revenues quarter over quarter. As the Company's revenues grow these expenses as a percentage of revenues are expected to decrease. The corporate infrastructure that the Company has established can accommodate significant future revenue growth.

Selling, general and administrative expenses for the third quarter of 2006 of $11.7 million have decreased from $12.9 million for the second quarter of 2006 primarily due to lower management bonuses resulting from the reduction in revenue and pretax income relating to the traditional July shut-down period, and lower engineering costs.

Capital expenditures for the quarter ended September 30, 2006 totaled $20.3 million versus $3.7 million for the quarter ended September 30, 2005 and $18.2 million for the quarter ended June 30, 2006. Capital expenditures relate primarily to new program assembly equipment being put in place for programs that have launched, as well as assets acquired to accommodate future growth.

The Company's financial condition remains strong given the continuing profitability of its operations and its prospects for growth and new program launches, as well as its strong balance sheet.

Fred Jaekel, Martinrea's Chief Executive Officer, stated: "I am very pleased with Martinrea's third quarter results, as we continued to show improvement in our revenues and profits on a year over year basis. This was our best third quarter in our history as a company, and another record quarterly performance for us this year. The year 2006 is on track to be our best to date from a financial perspective. I am very proud of our employees for their ongoing performance, which is the basis for our financial and operational results. One area in which we continue to perform well is in our launch activity. I am happy to report that our product launches in connection with the fluid and metallic products we are producing for GM's new line of pick up trucks have gone very well. There is a tremendous amount of preparation and commitment behind a good launch, and that is what we achieved for our customer. It is very important for any program to start well, and I believe we are building a very solid reputation with our client base regarding our launching capabilities. A demonstrated ability to perform well for our customers will continue to give us increasing opportunities to win new work and takeover business, which will help us fill existing capacity and contribute to both top line and bottom line performance. During the third quarter of 2006 the Company won $15 million in new incremental business launching in the summer of 2008 and 2009. Approximately $6 million of the business award relates to metallic business on the new DCX Challenger. The remainder is fluid management business expected to launch in 2009."

Mr. Jaekel added, "We anticipate that our previously announced acquisition of ThyssenKrupp Budd's North American body and chassis operations which will be completed by year end will add to our capabilities, giving us new additional technological strengths and locations to support the needs of our customers. We are very much looking forward to working with those people to offer innovative and creative solutions to our customers".

Nick Orlando, Martinrea's President and Chief Financial Officer, stated: "Our third quarter performance was good, and our divisions continue to operate well. July is typically a slow month for our company, with the traditional shut down periods of our customers resulting in similar shutdown periods for our plants, but our August and September performance was robust in comparison to previous years. I note that the traditional two week July customer summer shutdown was extended in several cases to three weeks as customers managed their inventory needs on some of their programs. In the fourth quarter of 2006, the Company estimates that revenues will range from $175 million to $190 million. We anticipate that earnings per share for the fourth quarter of 2006 will range from $0.12 to $0.15 per share on a basic and fully diluted basis.

Both would be significant improvements from the previous year comparable. Based on customer releases we have received, there will be some downtime in the quarter on several programs on which we have exposure as customers monitor and adjust their inventory levels, and that will negatively impact volumes, revenues and earnings to some degree. Overall though, 2006 will be a record year for Martinrea from a revenues, earnings and earnings per share perspective. In looking at these numbers for the fourth quarter, it is noted that ThyssenKrupp Budd operations have not been taken into account."

Nick Orlando added: "As a result of our growth and ongoing expansion programs, we anticipate that capital expenditures for the 2006 fiscal year will approximate $59 million, an increase from our previous estimate of $47 million. The increase in capital from the previous estimate is attributable to new contract commitments and the need to accelerate 2007 capital expenditures. The Company believes these assets will enhance overall capacity and enable us to have the capital resources available to take on identified new work. These capital expenditures will be financed by cash flow from operations, utilization of existing financing facilities and asset backed financing."

Rob Wildeboer, Martinrea's Chairman, stated: "We continue to look for and take advantage of opportunities in this market, in each case with a very focused and prudent approach to profitable growth. We believe that the pending acquisition of ThyssenKrupp Budd's North American body and chassis operations reflects our prudent approach to growth, and will strengthen our Company and increase our long term value. At the same time, we believe that in our existing operations we are being innovative and creative in offering great products at competitive prices to our customers, which will win us business. Our entrepreneurial and decentralized structure continues to be a strength for us, and our strong balance sheet continues to provide us a competitive advantage to many other suppliers in bidding for new work. Customers need and like to see strong and financially healthy suppliers, led by strong operational people with a commitment to product excellence. While our immediate focus is the completion of our pending acquisition, we will continue to pursue new business and opportunities that make sense for our company."

The common shares of Martinrea trade on The Toronto Stock Exchange under the symbol "MRE".

This press release contains forward-looking statements based on assumptions, uncertainties and management's best estimates of future events. When used herein, words such as "intend" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on assumptions by and information available to the Company. Investors are cautioned that such forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include such risks and factors as are detailed from time to time in the Company's periodic reports filed with the Ontario Securities Commission and other regulatory authorities. Actual results may differ materially from those currently anticipated. The Company has no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.



MARTINREA INTERNATIONAL INC.
Interim Consolidated Balance Sheets

As at September 30, 2006 (unaudited) with
comparative figures for December 31, 2005
(in thousands of dollars)

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September 30, December 31,
2006 2005
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Assets

Current assets:
Cash and cash equivalents $ 2,732 $ 2,059
Accounts receivable 129,914 114,134
Other receivables 19,885 9,688
Income taxes recoverable - 1,367
Inventories (note 4) 81,343 54,303
Prepaid expenses and deposits 8,218 2,903
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242,092 184,454

Future income tax assets 16,500 16,195
Investment (note 3) 2,060 835
Capital assets (note 5) 251,679 228,283
Goodwill 230,558 230,558
Intangible assets (note 2 and 6) 24,115 24,034

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$ 767,004 $ 684,359
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Liabilities and Shareholders' Equity

Current liabilities:

Accounts payable and accrued liabilities $ 129,025 $ 125,250
Income taxes payable 7,996 -
Current portion of long-term debt (note 7) 12,706 18,260
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149,727 143,510

Long-term debt (note 7) 51,221 53,365

Future income tax liabilities 21,371 22,047

Non-controlling interest 1,155 946

Shareholders' equity:
Share capital (note 8) 491,456 439,061
Notes receivable for share capital (note 8) (15,750) (15,750)
Contributed Surplus 25,520 25,339
Cumulative translation adjustment (19,628) (16,462)
Retained earnings 61,932 32,303
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543,530 464,491

Guarantees (note 10)

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$ 767,004 $ 684,359
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On behalf of the Board:

"Fred Jaekel" Director
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"Robert Wildeboer" Director
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MARTINREA INTERNATIONAL INC.
Interim Consolidated Statements of
Earnings and Retained Earnings

Three and nine months ended September 30,
2006 and 2005 (unaudited)
(in thousands of dollars except per share amounts)

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Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
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Sales $ 174,120 $ 161,408 $ 572,126 $ 484,534

Cost of sales 142,800 134,404 465,961 402,099
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Gross profit 31,320 27,004 106,165 82,435

Expenses:
Selling, general and
administrative 11,738 10,879 36,611 33,143
Foreign exchange (121) (68) (204) (354)
Amortization - capital
assets (note 5) 9,699 6,332 25,210 18,048
Amortization
- intangible
assets (note 6) 977 866 2,745 2,597
Interest on long term
debt 1,042 945 2,777 3,125
Other interest expense
(income), net (431) 768 (531) 1,332
(Gain) loss on disposal
of capital assets (1,466) (30) (1,458) (99)
Gain on sale of
investment in Hy-Drive
Technologies Ltd. (1,820) 0 (4,716) -
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19,618 19,692 60,434 57,792
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Earnings before
income taxes and
non-controlling
interest 11,702 7,312 45,731 24,643

Income taxes
Current 4,712 2,383 15,692 8,785
Future (606) 281 201 (66)
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4,106 2,664 15,893 8,719

Earnings before
non-controlling interest 7,596 4,648 29,838 15,924

Non-controlling interest 79 90 209 191
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Net earnings $ 7,517 $ 4,558 $ 29,629 $ 15,733

Retained earnings,
beginning of period 54,415 23,295 32,303 12,120

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Retained earnings,
end of period $ 61,932 $ 27,853 $ 61,932 $ 27,853
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Earnings per common
share (note 9)

Basic $ 0.12 $ 0.08 $ 0.50 $ 0.28
Diluted $ 0.12 $ 0.08 $ 0.48 $ 0.27

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MARTINREA INTERNATIONAL INC.
Interim Consolidated Statements of Cash Flows

Three and nine months ended September 30, 2006
and 2005 (unaudited)
(in thousands of dollars)

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Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
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Cash provided by (used in):

Operating activities:
Net earnings $ 7,517 $ 4,558 $ 29,629 $ 15,733
Items not requiring
cash:
Amortization - capital
assets (note 5) 9,699 6,332 25,210 18,048
Amortization
- intangible assets
(note 6) 977 866 2,745 2,597
Future income taxes (683) 281 (981) (66)
Non-controlling interest 79 90 209 191
(Gain) loss on disposal
of capital assets (1,466) (30) (1,458) (99)
Gain on sale of
investment in Hy-Drive
Technologies Ltd. (1,820) - (4,716) -
Stock-based compensation 73 222 181 443
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14,376 12,319 50,819 36,847

Changes in non-cash
working capital items:
Accounts receivable 6,598 (19,125) (8,301) (27,800)
Other receivables (7,504) 2,793 (9,876) 3,398
Income taxes 3,681 908 9,363 6,743
Inventories (7,755) (3,603) (21,182) (5,945)
Prepaid expenses
and deposits (2,836) (133) (3,156) 51
Accounts payable and
accrued liabilities (3,607) (2,036) 541 11,419
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2,953 (8,877) 18,208 24,713
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Financing activities:
Issue of share capital
(net of share
issuance costs) - - 52,395 -
Increase in long-term debt 575 - 6,575 14,576
Repayment of
long-term debt (3,389) (4,600) (13,953) (12,634)
Decrease in bank
indebtedness - 19,093 - 11,414
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(2,814) 14,493 45,017 13,356
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Investing activities:
Acquisition of Corydon
Manufacturing LLC - - - (15,209)
Acquisition of Depco
International Inc.
(net of cash acquired) - - (20,239) -
Investment in Hy-Drive
Technologies Ltd. (760) - (2,540) (835)
Purchase of
capital assets (20,304) (3,687) (46,496) (19,998)
Proceeds on disposal
of capital assets 1,578 344 1,726 417
Proceeds on disposal of
investment in Hy-Drive
Technologies Ltd. 2,300 - 6,031 -
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(17,186) (3,343) (61,518) (35,625)
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Effect of exchange rate
changes on cash and
cash equivalents 43 (2,273) (1,034) (2,444)
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Increase in cash and
cash equivalents (17,004) - 673 -

Cash and cash equivalents,
beginning of period 19,736 - 2,059 -

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Cash and cash equivalents,
end of period $ 2,732 $ - $ 2,732 $ -
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Supplemental cash flow
information:
Cash paid for
interest, net $ 687 $ 1,640 $ 2,390 $ 4,322
Cash paid for income
taxes, net $ 941 $ 1,854 $ 6,150 $ 3,617

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A conference call to discuss these results will be held on Friday, November 10, 2006 at 8:00 a.m. (Toronto time), which can be accessed by dialing (416) 340-2216 or toll free (866) 898-9626. Please call 10 minutes prior to the start of the conference call.

If you have any teleconferencing questions, please call Andre La Rosa at (416) 749-0314.

There will also be a rebroadcast of the call available by dialing (416) 695-5800 or toll free (800) 408-3053 (conference id -- 3195000#). The rebroadcast will be available until Friday, November 18, 2006.

Contact Information

  • Martinrea International Inc.
    Nick Orlando
    President and Chief Financial Officer
    (416) 749-0314
    (905) 264-2937 (FAX)