GUELPH, ONTARIO--(CCNMatthews - Nov. 9, 2005) - Linamar Corporation (TSX:LNR) ("Linamar" or "the company"), a global supplier who designs, develops and manufactures precision machined components, modules and systems for engine, transmission, chassis and industrial applications primarily for the North American, European and Asia Pacific automotive marketplace, today announced its financial results for the third quarter ended September 30, 2005.
(CDN dollars in thousands except per share figures) Three Months Ended Nine Months Ended September 30 September 30 2005 2004 2005 2004 --------------------------------------------------------------------- $ $ $ $ Sales 529,676 478,740 1,637,955 1,369,963 Gross Margin 66,786 52,682 207,809 175,140 Operating Earnings(1) 40,393 32,478 131,707 109,019 Earnings from Continuing Operations 22,477 19,808 74,639 66,159 Net Earnings 22,477 24,952 74,639 68,268 --------------------------------------------------------------------- Diluted Earnings per Share from Continuing Operations 0.32 0.28 1.05 0.93 Diluted Earnings per Share 0.32 0.35 1.05 0.96 ---------------------------------------------------------------------
A more detailed discussion of the consolidated results for the quarter ended September 30, 2005, including the financial statements and Management Discussion and Analysis ("MD&A") can be viewed at www.linamar.com after 4pm EST or at www.sedar.com on the business day following this release.
Third Quarter Operating Highlights
Overall third quarter sales increased by $51.0 million or 10.7% to $529.7 million, compared to $478.7 million in the same quarter last year. Third quarter year to date sales have increased $268.0 million or 19.6%, to $1,638.0 million, compared to $1,370.0 million for the same period in 2004. The sales growth has been primarily driven by both automotive and industrial product sales. The primary factors behind the increase in sales of automotive components were volumes on the heavy and medium duty Caterpillar Inc. ("CAT") cylinder heads, Allison Transmission ("Allison") transmission components, a DaimlerChrysler ("DCX") differential case program, Ford Motor Company ("Ford") cylinder heads as well as a Visteon Corporation ("Visteon") differential case program. Industrial product sales have increased $25.4 million for the quarter or 37.8% and $73.9 million or 38.2% year to date. The increase in industrial products has been predominantly driven by market demand for aerial lift platforms produced by Skyjack Inc. ("Skyjack").
(1) "Operating earnings", as used by the chief operating decision makers and management, monitors the performance of the business specifically at the segmented level. Operating earnings is calculated by the company as gross margin less selling, general and administrative expenses and equity loss.
Three Months Ended Nine Months Ended September 30 September 30 2005 2004 2005 2004 --------------------------------------------------------------------- $ $ $ $ Gross margin 66,786 52,682 207,809 175,140 Selling, general and administrative 26,393 20,204 76,102 66,121 --------------------------------------------------------------------- Operating earnings 40,393 32,478 131,707 109,019 ---------------------------------------------------------------------
Under Canadian generally accepted accounting principles ("GAAP"), this financial measure does not have a standardized meaning and, therefore is unlikely to be comparable to similar measures presented by other issuers.
North American content per vehicle for the third quarter grew by 5.5% to $94.08 per vehicle compared to $89.21 for the same quarter in the prior year. Content for the year to date was $93.94 as compared to $79.02 in 2004. European content per vehicle for the quarter decreased by 2.4% to $8.08 per vehicle compared to $8.27 for the same quarter in the prior year. For the year to date, 2005 content was $7.65 down slightly from $7.78 in 2004. Linamar has also established content in Asia Pacific of $0.09 for the quarter or $0.07 for the year to date.
The effect of the stronger Canadian dollar compared with the U.S. dollar in the first nine months of 2005 versus the first nine months of 2004 reduced sales by $73.9 million ($28.8 million for the third quarter). Sales would have otherwise increased by 25.0% year to date (16.7% for the quarter).
Operating earnings in the third quarter increased by 24.3% to $40.4 million, compared to $32.5 million for the same period last year. The company's operating earnings grew by $22.7 million or 20.8% for the nine months ended in 2005 compared with 2004. Operationally, the improvement is attributed to growth in both the automotive and industrial businesses. Automotive is now realizing the anticipated volumes on previous launches such as a highly automated DCX differential case program, various medium and heavy duty CAT cylinder heads and Ford cylinder heads. These programs are now utilizing the planned production capacity in place at launch. Industrial products have been positively impacted by continued sales volume increases and the expansion of a reconditioning division.
Geographically and operationally, the Asia Pacific segment has been segregated from the Canadian and North American Automotive Systems segment during the year. This segment is currently experiencing losses as it incurs costs related to the commencement of operations in both China and Korea.
Earnings from continuing operations for the quarter were $22.5 million or 4.2% of sales compared to $19.8 million or 4.1% representing a 13.6% increase year over year. Year to date earnings from continuing operations were $74.6 million or 4.6% versus $66.2 million or 4.8% in 2004. The increased earnings can be attributed to the growth in operating earnings partially offset by higher interest costs related to additional financing obtained in October 2004, and a slightly higher effective tax rate.
Linamar continues to be focused and proactive in the management of its accounts receivable, particularly related to at-risk customers. The company continues to monitor and manage its relationship with Delphi Corporation ("Delphi") through their reorganization process. It is the belief of Linamar that the bankruptcy proceeding for Delphi will not have a material effect on the results of the company.
The Board of Directors today declared a dividend of $0.06 per share on the common shares of the company, payable on or after December 13, 2005 to shareholders of record on November 25, 2005.
During the next few years, Linamar anticipates continued growth in both sales and earnings. The company is expecting to launch new programs as well as see existing programs achieve their anticipated levels of production such that growth in content per vehicle for 2005 is forecasted at 12-17% in North America, and 0-5% in Europe. Asia Pacific expects to report a content of $0.09 for 2005 which will significantly increase for a few years thereafter while facilities continue to ramp up. Non-automotive sales will grow 25-30% this year.
2006 is expected to be a year of growth preparation for the company. Several launches for major new programs such as various 6-speed transmissions in North American and new engine platforms in both North America and Europe will initiate production though at a much lower volume level than originally anticipated. At the same time, continued strengthening of the Canadian dollar to the U.S. dollar has impacted expected content growth in North America. Accordingly, content growth in 2006 in both North America and Europe is expected to be quite modest, at most 5%. Non-automotive sales are expected to grow 10-15%. The modest sales growth and launch costs are expected to result in flat earnings in 2006 vs. 2005, with good earnings growth resuming in 2007 and 2008 as these various programs substantially ramp up.
The growth of Linamar's automotive business has progressed through increasing complexity of manufacturing and design responsibilities to graduate from single components to more integrated assemblies. Sales growth projections are based on program launches including transmission programs (such as differential cases for DCX, Visteon, and Eaton Corporation, WK carriers and differential cases, Ford, General Motors Corporation ("GM") and DCX 6-speed components, and other transmission carrier assemblies), engine programs (such as Ford, DCX, and CAT cylinder heads and blocks, various camshafts, and Perkins engine blocks), chassis programs (such as Visteon gear hub and wheel housing, Toyota Motor Corporation knuckles, American Axle and Manufacturing, Inc. slip yokes), and European programs (such as Denso Corporation common rails and hydraulic manifolds, Robert Bosch GmbH pump housing, and Ford differential cases). Linamar also supplies the medium and heavy truck markets and expects continued strength through 2006 with softening in 2007. Earnings growth expectations are based on launch and sales ramp-ups of the programs noted as well as maturity in other programs where efficiencies of production are achieved and maintained.
In the company's industrial products business, which is comprised mainly of Linamar's Skyjack operations, the market remains highly competitive. The North American rental industry is expected to remain strong at least through 2006 and 2007 as a series of large projects commence construction. This may be offset partially by an expected cooling off in the residential market. Growth in the European construction market is expected to gain momentum allowing Skyjack's further market penetration in the region. Continued growth of the overall business is also based upon the re-introduction of booms expected in 2006 as well as further expansion into Asian and European markets of existing products.
The stronger Canadian dollar has the impact of lowering sales and to the extent that the company purchases material or supplies in U.S. dollars, this effect is substantially reduced. Equipment is also purchased in U.S. dollars; when the Canadian dollar strengthens, the equipment cost is reduced as is depreciation over future years. Since Linamar's business is capital intensive, U.S. dollar purchases have a notable positive impact on earnings over future periods. The company continues to employ a hedging strategy for net U.S. dollar positive cash flows.
Overall, these expectations assume consistent levels of North American and European automobile production, no unforeseen changes in the existing business base, and are subject to overall economic conditions and world political events and factors. As well, for the rest of 2005 and beyond, Linamar will continue to realize the benefits provided by the Linamar Production System. The system is based on lean manufacturing principles found in the Toyota Production System. A key factor in the company's future growth strategy is the effect of economic fluctuations in the automotive industry and specifically vehicles produced for the markets in which Linamar participates. Variations in these factors can have a significant impact on the industry and Linamar.
Linamar believes that its strategy to focus on the engine, transmission and chassis components of the automobile represents a significant opportunity for growth as products in these applications are expected to be the next major area of outsourcing by the original equipment manufacturers ("OEM") over the next 10 to 20 years. Other aspects of the vehicles such as interiors, seating, and structural components have already experienced greater levels of outsourcing. In addition, management believes future trends include more involvement by suppliers in component and module design, a move towards global vehicle platforms and supply base consolidation.
The company believes that it is uniquely positioned with its core competencies in precision machining and manufacturing processes, and its range of precision machined and assembled automotive and non-automotive products. To build on this strong business base, Linamar intends to continue to develop the organization and its capabilities by enhancing its existing expertise to produce every machined component in the vehicle. Linamar's strategy is to establish and develop a market leadership position in key components and assemblies, enhancing its design, development and testing expertise, and researching opportunities in product and process innovation.
The company's strategy of some diversification in industry (such as aerial lift platforms business and medium and heavy truck business) as well as in terms of customers, platforms and products produced on the light vehicle side, is helping the company to manage through this challenging time in the light vehicle automotive industry.
Risk and Uncertainties (forward looking statements)
Certain information provided by Linamar in these unaudited interim financial statements, MD&A and other documents published throughout the year that are not recitation of historical facts may constitute forward looking statements. The words "estimate", "believe", "expect" and similar expressions are intended to identify forward-looking statements. Persons reading this report are cautioned that such statements are only predictions and the actual events or results may differ materially. In evaluating such forward-looking statements, readers should specifically consider the various factors that could cause actual events or results to differ materially from those indicated by such forward-looking statements.
Such forward-looking information may involve important risks and uncertainties that could materially alter results in the future from those expressed or implied in any forward-looking statements made by, or on behalf of, Linamar.
Some risks and uncertainties may cause results to differ from current expectations. The factors which are expected to have the greatest impact on Linamar include but are not limited to (in the various economies in which Linamar operates): the extent of OEM outsourcing, industry cyclicality, trade and labour disruptions, pricing concessions and cost absorptions, delays in program launches, the company's dependence on certain engine and transmission programs and major OEM customers, currency exposure, and technological developments by Linamar's competitors.
A large proportion of the company's sales are denominated in U.S. dollars and the company also purchases a significant amount of raw materials, supplies and equipment in U.S. dollars. The strengthening of the Canadian dollar has the potential to have a negative impact on financial results. The company has employed a hedging strategy to attempt to mitigate the impact but cannot be completely assured that the entire exchange effect has been offset.
As a result of current levels of consumer spending on automobiles, the OEMs are constantly facing volume challenges which are reflected in the results of Linamar through reduced volumes on some existing programs. The OEMs do, however, continue to outsource, although not at expected levels, which allows Linamar to expand and diversify its product base.
Other factors and risks and uncertainties that cause results to differ from current expectations discussed in the MD&A include, but are not limited to: fluctuations in interest rates, environmental emission and safety regulations, governmental, environmental and regulatory policies, and changes in the competitive environment in which Linamar operates. Linamar assumes no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those reflected in the forward-looking statements.
Frank Hasenfratz Linda Hasenfratz Chairman of the Board Chief Executive Officer Guelph, Ontario November 9, 2005
FOR FURTHER INFORMATION PLEASE CONTACT: