GUELPH, ONTARIO--(CCNMatthews - May 11, 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 and European automotive marketplace, today announced its financial results for the first quarter ended March 31, 2005.
(CDN dollars in thousands except per share figures)
Three Months Ended
March 31
2005 2004
---------------------------------------------------------------------
$ $
Sales 529,474 430,597
Gross Margin 63,486 58,687
Operating Earnings (1) 39,692 36,391
Earnings from Continuing Operations 22,405 21,730
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Diluted Earnings per Share
from Continuing Operations 0.32 0.31
Diluted Earnings per Share 0.32 0.29
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First Quarter Operating Highlights
First quarter sales increased by 23.0% to $529.5 million, compared to $430.6 million in the same quarter last year. The increase was lead by strong growth in North American automotive systems, related to both light vehicles, and medium and heavy trucks, which grew by 23.9% to $430.7 million, compared to $347.7 million in the first quarter of 2004. The growth was the result of the ramp up of new programs launched in recent periods (net of programs ending) as well as volume increases on other new and established programs. Industrial sales also increased by 25.4% to $65.0 million, compared to $51.8 million in the same quarter last year as sales of Skyjack Inc. ("Skyjack") products continued to increase in volume.
The effect of the stronger Canadian dollar compared with the U.S. dollar in the first quarter of 2005 versus the first quarter of 2004 reduced automotive sales by $19.8 million. Sales would therefore have increased by 27.6% for the quarter.
(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
March 31
2005 2004
---------------------------------------------------------------------
$ $
Gross margin 63,486 58,687
Selling, general and administrative 23,794 22,296
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Operating earnings 39,692 36,391
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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.
Operating earnings in the first quarter increased by 9.1% to $39.7 million, compared to $36.4 million for the same period last year. Geographically, operating earnings increased by 16.3% in Canada, and 7.5% in the United States, both due to stronger earnings in the industrial and automotive businesses. Mexico's operating earnings were reduced due to launch costs while European operating earnings remained consistent.
Each operational segment also saw improved operating earnings. North American Automotive Systems earnings, despite the improvement, were impacted as a percentage of sales by higher material content machining and assembly programs achieving greater sales volume in the quarter and significantly higher tooling sales with low margins. European comparative results reflected an improvement as the loss was significantly reduced compared to the prior year. Industrial operating earnings grew by 19.3%.
Net earnings from continuing operations were $22.4 million or 4.2% of sales compared to $21.7 million or 5.0% representing a marginal dollar increase, year over year. In addition to the issues outlined above, earnings growth was impacted by increased depreciation on launching programs, higher interest costs, and a slightly higher tax rate.
North American content per vehicle for the first quarter grew by 26.9% to $92.03 per vehicle compared to $72.50 for the same quarter in the prior year. European content per vehicle for the quarter grew by 1.2% to $7.79 per vehicle compared to $7.70 for the same quarter in the prior year.
A more detailed discussion of the consolidated results for the quarter ended March 31, 2005, is contained in the Management Discussion and Analysis ("MD&A") following the separately released annual consolidated financial statements.
Dividends
The Board of Directors today declared a dividend of $0.06 per share on the common shares of the company, payable on or after June 9, 2005 to shareholders of record on May 27, 2005.
Outlook
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 10-15% in North America and 5-10% in Europe.
Sales growth projections are based on program launches which include transmission business (such as differential cases for DaimlerChrysler and Eaton Corporation, WK transmission carriers and differential cases, Ford Motor Company 6R and 6F transmission components, other transmission carriers, as well as output and coupler shafts), engines business (such as 3.7L crankshafts, 4.0L, 3.5L, 3.9L and Gen IV and NG6 camshafts, 6.1L engine block, 3.5L V6 heads, blocks and camshafts), and continued strength in the industrial products category. Linamar also supplies the medium and heavy truck markets. In 2004, these markets recovered significantly, fueling expectations for continued strength in 2005 and beyond 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. The earnings expectation also assumes that the progress made in the past several years in Mexico will be maintained, and on-going performance will show improvement. Earnings growth anticipates that Linamar Antriebstechnik ("LAT") will launch and ramp up its camshaft and cylinder head & block programs turning that business from losses in 2004 and 2005 to profitable performance beginning in 2006. The remaining European business based in Hungary will steadily grow in both sales and earnings as programs with Denso Corporation and Delphi Corporation (common rails and hydraulic manifolds), Robert Bosch GmbH (pump housing) and Honeywell International (turbo housings) take effect in the automotive sectors. Industrial and agricultural business also show some growth. Other Linamar Hungary RT product areas remain difficult to forecast and predict because markets can be affected by the presence or lack of government subsidies available to purchasers (i.e. agriculture), the success of customer products in very competitive markets (i.e. construction equipment) or market acceptance of new customer technologies (i.e. ATI vehicle track systems).
In the company's industrial products business, which is comprised of Linamar's Skyjack operations, the market remains highly competitive. The construction equipment market rebounded in 2004 and the expectation is that the market will remain strong through 2005 and beyond, provided current economic conditions continue. In 2004, strong sales growth for Skyjack occurred not only in North America but also in the United Kingdom and the rest of Europe. Performance by market is very difficult to predict. The significant increase in Skyjack sales in 2004 over 2003 is expected to moderate somewhat in 2005 as the market will remain strong although growth will increase at a slower rate.
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, in 2005, 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 Motor Corporation's Production System.
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.
A key factor in Linamar'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.
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. The company also employs a hedging strategy for net U.S. dollar positive cash flow.
Risk and Uncertainties (forward looking statements)
Certain information provided by Linamar in these unaudited interim financial statements, Management's Discussion and Analysis ("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 this 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
May 11, 2005
LINAMAR CORPORATION
CONSOLIDATED BALANCE SHEETS
As at March 31, 2005 with comparatives as at December 31, 2004
(Unaudited)
(in thousands of dollars)
March 31 December 31
2005 2004
---------------------------------------------------------------------
$ $
ASSETS
Current Assets
Cash 21,796 25,508
Accounts receivable 428,338 359,356
Inventories 179,613 193,839
Prepaid expenses 7,355 6,889
Current portion of other long-term
assets 3,828 3,722
Current portion of long-term receivables 3,344 3,772
Future income taxes 2,345 3,141
Current assets - discontinued operations 2,681 2,962
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649,300 599,189
Other Long-Term Assets 6,948 6,690
Long-term Receivables 12,047 10,490
Goodwill and Other Intangible Assets 33,793 33,719
Property, Plant and Equipment 793,819 796,410
Property, Plant and Equipment -
Discontinued Operations 1,794 1,833
Future Income Taxes - Discontinued
Operations 590 605
---------------------------------------------------------------------
1,498,291 1,448,936
---------------------------------------------------------------------
---------------------------------------------------------------------
LIABILITIES
Current Liabilities
Unpresented cheques 30,177 12,997
Short-term bank borrowings 80,339 50,919
Accounts payable and accrued liabilities 297,997 305,161
Income taxes payable 2,146 3,360
Current portion of long-term debt 7,063 7,038
Current portion of deferred gain (note 3) 6,873 9,206
Current liabilities - discontinued
operations 2,041 2,090
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426,636 390,771
Long-Term Debt 306,508 308,151
Future Income Taxes 26,384 27,094
Non-Controlling Interests 29,250 30,316
---------------------------------------------------------------------
788,778 756,332
---------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital Stock 103,206 103,173
Retained Earnings 643,931 625,764
Contributed Surplus (note 2) 78 78
Cumulative Translation Adjustment (37,702) (36,411)
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709,513 692,604
---------------------------------------------------------------------
1,498,291 1,448,936
---------------------------------------------------------------------
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On behalf of the Board of Directors:
Frank Hasenfratz Linda Hasenfratz
Chairman of the Board Director
LINAMAR CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended March 31, 2005 and March 31, 2004
(Unaudited)
(in thousands of dollars, except per share figures)
Three Months Ended
March 31
2005 2004
---------------------------------------------------------------------
$ $
(Restated
- Note 5)
Sales 529,474 430,597
Cost of Sales 432,927 343,950
Amortization 33,061 27,960
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Gross Margin 63,486 58,687
---------------------------------------------------------------------
Selling, general and administrative 23,794 22,296
---------------------------------------------------------------------
Earnings Before the Following: 39,692 36,391
---------------------------------------------------------------------
Interest on long-term debt (3,981) (1,725)
Other interest expense (487) (1,286)
Interest earned 416 268
Dilution loss - (248)
Other income 91 416
---------------------------------------------------------------------
35,731 33,816
---------------------------------------------------------------------
Provision for Income Taxes
Current 12,587 6,715
Future 272 5,003
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12,859 11,718
---------------------------------------------------------------------
22,872 22,098
Non-Controlling Interests 467 368
---------------------------------------------------------------------
Earnings from Continuing Operations 22,405 21,730
Results of Discontinued Operations (note 5) - (1,489)
---------------------------------------------------------------------
Net Earnings for the Period 22,405 20,241
---------------------------------------------------------------------
---------------------------------------------------------------------
Basic Earnings per Share
from Continuing Operations 0.32 0.31
---------------------------------------------------------------------
Diluted Earnings per Share
from Continuing Operations 0.32 0.31
---------------------------------------------------------------------
Basic Earnings per Share 0.32 0.29
---------------------------------------------------------------------
Diluted Earnings per Share 0.32 0.29
---------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the three months ended March 31, 2005 and March 31, 2004
(Unaudited)
(in thousands of dollars)
Three Months Ended
March 31
2005 2004
---------------------------------------------------------------------
$ $
Balance - Beginning of Period 625,764 544,589
Stock based compensation (note 2) - (41)
---------------------------------------------------------------------
Balance - As restated (note 2) 625,764 544,548
Net Earnings for the Period 22,405 20,241
Dividends (4,238) (2,824)
---------------------------------------------------------------------
Balance - End of Period 643,931 561,965
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LINAMAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2005 and March 31, 2004
(Unaudited)
(in thousands of dollars)
Three Months Ended
March 31
2005 2004
---------------------------------------------------------------------
Cash Provided By (Used In) $ $
(Restated
- Note 5)
Operating Activities
Earnings from continuing operations 22,405 21,730
Non-cash charges (credits) to earnings:
Amortization of property, plant and
equipment 33,061 27,960
Future income taxes net of unrealized
exchange loss 272 5,003
Non-controlling interests 467 368
Unrealized exchange loss (gain) on debt 175 (1,349)
Amortization of deferred exchange gain (2,333) (3,392)
Loss on disposal of property, plant
and equipment 105 277
Other 348 154
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54,500 50,751
Changes in non-cash working capital:
Increase in accounts receivable (72,627) (35,413)
Decrease in inventories 12,947 7,040
Increase in prepaid expenses (583) (1,131)
Decrease in income taxes payable (1,309) (3,675)
Increase in accounts payable and
accrued liabilities 7,255 12,275
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183 29,847
Deferred gain - 2,785
---------------------------------------------------------------------
Cash flow - continuing operations 183 32,632
Cash flow - discontinued operations 286 (761)
---------------------------------------------------------------------
469 31,871
---------------------------------------------------------------------
Financing Activities
Proceeds from short-term bank borrowings 30,065 14,884
Proceeds from long-term debt 58 2,221
Repayment of long-term debt (1,440) (4,829)
Proceeds from common share issuance 33 -
Dividends to shareholders (4,238) (2,824)
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24,478 9,452
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Investing Activities
Payments for purchase of property,
plant and equipment (46,101) (62,259)
Proceeds on disposal of property,
plant and equipment 1,891 122
Investment by minority shareholders - 3,738
Investment in other long-term assets (450) (673)
Investment in long-term receivables (1,129) (10,329)
Other - (316)
Discontinued operations - (23)
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(45,789) (69,740)
---------------------------------------------------------------------
(20,842) (28,417)
Effect of Translation Adjustment (50) 390
---------------------------------------------------------------------
Decrease in Cash Position (20,892) (28,027)
Cash Position - Beginning of Period 12,511 29,330
---------------------------------------------------------------------
Cash Position - End of Period (8,381) 1,303
---------------------------------------------------------------------
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Comprised of:
Cash 21,796 24,475
Unpresented cheques (30,177) (23,172)
---------------------------------------------------------------------
(8,381) 1,303
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LINAMAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2005 and March 31, 2004
(Unaudited)
1. Management prepared these interim consolidated financial statements in accordance with Canadian Generally Accepted Accounting Principles using the historical cost basis of accounting and approximation and estimates based on professional judgments. These interim consolidated financial statements contain all adjustments that management believes are necessary for a fair presentation of the company's financial position, results of operations and changes in cash flows. These interim consolidated financial statements should be used in conjunction with the company's most recent annual consolidated financial statements. These interim consolidated financial statements and the notes thereto have not been reviewed by the company's external auditors, pursuant to a review engagement applying review standards set out in the Canadian Institute of Chartered Accountants ("CICA") Handbook. The accounting policies used in preparing these interim consolidated financial statements are consistent with those used in preparing the annual consolidated financial statements.
2. Stock Based Compensation (in thousands of dollars)
Beginning January 1, 2004 the company adopted revised CICA 3870 retroactively and chose not to restate prior periods as permitted under the revised section. The effect of the restatement was the setup of contributed surplus in the amount of $78 for the fair value of options granted after January 1, 2002 and a reduction in the balance of opening retained earnings by $41 as the cumulative effect of the change on prior periods for the amount that would have been expensed. For the three months ended March 31, 2005, $4 for the quarter and year-to-date was recorded as the compensation cost.
3. Financial Instruments
At March 31, 2005, the company was committed to a series of monthly forward and zero cost option contracts to sell U.S. dollars. As these forward and zero cost option contracts qualify for accounting as cash flow hedges, the unrealized gains and losses are deferred and recognized in the same period as the sales which generate the cash flows.
The company was also committed to a series of monthly forward exchange contracts to sell British pounds and two long-dated forwards to buy U.S. dollars. As these forward exchange contracts qualify for accounting as fair value hedges, they are marked to current exchange rates to offset the exchange gains and losses on the underlying hedged items.
During the prior year, the company placed forward contracts to buy U.S. dollars, effectively locking in gains on forward contracts. This transaction resulted in cash proceeds of $4.9 million. The gains have been deferred and have been amortized to revenue based on the terms of the original underlying contracts.
All forward and zero cost option contracts mature in the future as noted below. The company has continued to place forward contracts after the quarter end.
Average Average
Year Amount Hedged - Sell (Buy) Exchange Rate Trigger Rate
---------------------------------------------------------------------
2005 USD $8,000,000 for Canadian dollars 1.2539
2005 USD $30,000,000 for Canadian dollars 1.3050 1.4255
2006 USD $10,000,000 for Canadian dollars 1.3240 1.4441
2009 USD $(80,000,000) with Canadian dollars 1.3029
2014 USD $(40,000,000) with Canadian dollars 1.3535
2005 GBP Pounds Sterling 7,237,000
for Canadian dollars 2.2570
4. Segmented Sales and Earnings Information (Continuing Operations in thousands of dollars)
During the first quarter of 2005 the company formed the Asia Pacific operating group. The group does not currently meet the quantitative thresholds as established under CICA Handbook Section 1701, therefore it has been aggregated into the North American Automotive Systems segment based on their similar products and economic characteristics. Therefore, four of the company's six operating groups, Transmission, Engine, Chassis, and Asia Pacific are aggregated into the North American Automotive Systems segment. Substantially all automotive revenue for this group is derived from sales to major North American manufacturers. Europe stands alone as a segment and is in the automotive business.
During 2004, the Industrial group, which is primarily comprised of the self-propelled scissor lift platform business, became a quantified reportable segment. The corporate headquarters and other small operating entities are now reported in the North American Automotive Systems segment. The company has restated segmented information for prior periods.
Geographic For the three months ended March 31, 2005
-----------------------------------------
Sales to
external Inter-segment Operating
customers sales earnings (loss)
$ $ $
Canada 413,567 1,709 36,048
United States 43,113 2,176 4,335
Mexico 31,187 - (984)
Europe 41,607 2,883 293
-------------------------------------------------
Total 529,474 39,692
-------------------------------------------------
For the three months ended March 31, 2004
-----------------------------------------
Sales to
external Inter-segment Operating
customers sales earnings (loss)
$ $ $
Canada 327,973 609 30,908
United States 37,360 1,719 3,982
Mexico 28,465 - 1,220
Europe 36,799 1,919 281
-------------------------------------------------
Total 430,597 36,391
-------------------------------------------------
Operational For the three months ended March 31, 2005
-----------------------------------------
Sales to
external Inter-segment Operating
customers sales earnings (loss)
$ $ $
N.A. Automotive Systems 430,665 3,389 33,590
Europe 33,859 2,883 (263)
Industrial 64,950 206 6,365
-------------------------------------------------
Total 529,474 39,692
-------------------------------------------------
For the three months ended March 31, 2004
-----------------------------------------
Sales to
external Inter-segment Operating
customers sales earnings (loss)
$ $ $
N.A. Automotive Systems 347,675 1,952 32,309
Europe 31,114 1,919 (1,252)
Industrial 51,808 52 5,334
-------------------------------------------------
Total 430,597 36,391
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5. Discontinued operations (in millions of dollars)
In August 2004, the company completed the sale of its 50% joint venture in Weslin Industries Inc. ("Weslin"), a casting and machining facility located in Oroszlany, Hungary to Wescast Industries Inc. in exchange for cash consideration of $53.8 million.
As per the CICA Handbook Section 3475, the company has restated its consolidated statement of earnings results and consolidated statements of cash flows for the periods prior to the sale by moving the operations of the Weslin joint venture from continuing operations to discontinued operations. The company was part of the Europe segment for both the geographic and operational groups.
6. Earnings Per Share (in thousands of dollars except for per share figures)
Three Months Ended
March 31
2005 2004
---------------------------------------------------------------------
$ $
(Restated -
Note 5)
Earnings from Continuing Operations 22,405 21,730
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Net Earnings for the Period 22,405 20,241
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Weighted average common shares 70,628,143 70,603,476
Incremental shares from assumed
conversion of stock options 354,622 199,393
---------------------------------------------------------------------
Adjusted weighted average shares
for diluted earnings per share 70,982,765 70,802,869
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Earnings Per Share from Continuing
Operations
Basic 0.32 0.31
Diluted 0.32 0.31
Earnings Per Share from Net Earnings
Basic 0.32 0.29
Diluted 0.32 0.29
Earnings per share are calculated using the weighted daily average number of shares outstanding during the period.
7. Related Party Transactions (in thousands of dollars)
Included in the purchase of property, plant and equipment are the construction of buildings, building additions and building improvements in the aggregate amount of $1,347 by a company owned by the spouse of a director. Included in cost of sales, are maintenance costs of $433 by the same company. Included in cost of sales, are lease costs of $116 related to property leased from a company owned by two directors.
These transactions have been recorded at the exchange amount.
8. Pension Costs (in thousands of dollars)
The company has various contributory and non-contributory defined contribution pension plans which cover most employees. Current service pension costs are charged to earnings as they accrue. The following was expensed during the quarter:
Three Months Ended
March 31
2005 2004
---------------------------------------------------------------------
$ $
Government sponsored 4,855 3,961
Company sponsored 2,216 1,946
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9. Foreign Exchange (in thousands of dollars)
Included as part of selling, general and administrative expenses is a gain (loss) resulting from foreign exchange as follows:
Three Months Ended
March 31
2005 2004
---------------------------------------------------------------------
$ $
(Restated -
Note 5)
Foreign Exchange Gain (Loss) (179) 958
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10. Guarantees (in thousands of dollars)
Under a portfolio purchase agreement signed in the prior year, the company sells certain long-term receivables. Although title is transferred and no entitlement or obligated repurchase agreement is in place before maturity, the company remains exposed to certain risks of default on the amount of proceeds from receivables under securitization less recourse in the form of property, plant and equipment. The company has a maximum potential future payment of $21,615 over various terms of 3 to 5 years. The company has estimated recourse, in the form of property, plant and equipment, to recover a portion of the defaulted balances in the amount of $15,830.
The company has guaranteed the lease payments of Eagle Manufacturing LLC, a joint venture, for the full term of the lease which ends in 2010. The company is receiving a guarantee fee during the lease term. As at the quarter end the maximum potential amount of future payments is $13,934 over the remaining lease term.
The company has various other guarantees for a maximum potential future payment of $1,607 over various terms of 4 to 5 years. The company has estimated recourse, in the form of property, plant and equipment, to recover a portion of the guarantee payable from customers if balances remain unpaid in the amount of $760.
11. Contingent Liabilities and Commitments (in thousands of dollars)
The company is involved in certain lawsuits and claims. Management believes that adequate provisions have been recorded in the accounts. Although it is not possible to estimate the potential costs and losses, if any, management is of the opinion that there will not be any significant additional liability other than amounts already provided for in these financial statements.
As at March 31, 2005, outstanding commitments for capital expenditures under purchase orders and contracts amounted to approximately $93,315.
12. Comparative Figures
Certain comparative figures have been reclassified in accordance with the current quarter's presentation (see notes 4 and 5).
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarter Ended March 31, 2005
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") of Linamar Corporation ("Linamar" or the "company") should be read in conjunction with its consolidated financial statements and related notes thereto as well as the annual MD&A for the year ended December 31, 2004. The accompanying interim consolidated financial statements and the notes thereto have not been reviewed by the company's external auditors pursuant to a review engagement applying review standards set out in the Canadian Institute of Chartered Accountants ("CICA") Handbook. This MD&A has been prepared as at May 11, 2005.
Additional information regarding Linamar, including copies of its continuous disclosure materials such as its annual information form, is available on its website at www.linamar.com or through the SEDAR website at www.sedar.com.
In this MD&A, reference is made to operating earnings which is not a measure of financial performance under Canadian generally accepted accounting principles ("GAAP"). Operating earnings is calculated by the company as gross margin less selling, general and administrative expenses and equity (earnings) loss. The company has included information concerning this measure because it is used by management as a measure of performance and management believes it is used by certain investors and analysts as a measure of the company's financial performance. This measure is not necessarily comparable to similarly titled measures used by other companies and should not be construed as alternatives to net earnings or cash flows from operating activities as determined in accordance with Canadian GAAP or as a measure of liquidity.
OVERALL CORPORATE PERFORMANCE
Overview of the Business
Linamar designs, develops and manufactures precision machined components, modules and assemblies for Brakes, Engine, Steering and suspension, and Transmission and driveline applications ("B.E.S.T.") for sale primarily to original equipment manufacturers ("OEMs") and Tier 1 customers for the North American and European car and light to heavy truck markets. Linamar's business includes industrial products that utilize the company's core competencies of precision machining and assembly. The company also produces agricultural implements in Hungary for worldwide use.
The following table sets out certain highlights of the company's performance for the first quarter of 2005 and 2004:
Three Months Ended
(in millions of dollars, except content March 31
per vehicle numbers) 2005 2004
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Sales $529.5 $430.6
Gross Margin 63.5 58.7
Operating Earnings(2) 39.7 36.4
Earnings from Continuing Operations 22.4 21.7
Content per Vehicle - North America $92.03 $72.50
Content per Vehicle - Europe $7.79 $7.70
Overall Corporate Results
First quarter sales increased by 23.0% to $529.5 million, compared to $430.6 million in the same quarter last year. The increase was lead by strong growth in North American automotive systems, related to both light vehicles, and medium and heavy trucks, which grew by 23.9% to $430.7 million, compared to $347.7 million in the first quarter of 2004. The growth was the result of the ramp up of new programs launched in recent periods (net of programs ending) as well as volume increases on other new and established programs. Industrial sales also increased by 25.4% to $65.0 million, compared to $51.8 million in the same quarter last year as sales of Skyjack Inc. ("Skyjack") products continued to increase in volume.
The effect of the stronger Canadian dollar compared with the U.S. dollar in the first quarter of 2005 versus the first quarter of 2004 reduced automotive sales by $19.8 million. Sales would therefore have increased by 27.6% for the quarter.
Operating earnings in the first quarter increased by 9.1% to $39.7 million, compared to $36.4 million for the same period last year. Geographically, operating earnings increased by 16.5% in Canada, and 7.5% in the United States, both due to stronger earnings in the industrial and automotive businesses. Mexico's operating earnings were reduced due to launch costs while European operating earnings remained consistent.
Each operational segment also saw improved operating earnings. North American Automotive Systems earnings, despite the improvement, were impacted as a percentage of sales by higher material content machining and assembly programs achieving greater sales volume in the quarter and significantly higher tooling sales with low margins. European comparative results reflected an improvement as the loss was significantly reduced compared to the prior year. Industrial operating earnings grew by 19.3%.
Net earnings from continuing operations were $22.4 million or 4.2% of sales compared to $21.7 million or 5.0% representing a marginal dollar increase, year over year. In addition to the issues outlined above, earnings growth was impacted by increased depreciation on launching programs, higher interest costs, and a slightly higher tax rate.
North American content per vehicle for the first quarter grew by 26.9% to $92.03 per vehicle compared to $72.50 for the same quarter in the prior year. European content per vehicle for the quarter grew by 1.2% to $7.79 per vehicle compared to $7.70 for the same quarter in the prior year.
(2) "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.
March 31 (in millions of dollars) 2005 2004 --------------------------------------------------------------------- Gross Margin $63.5 $58.7 Selling, general and administrative 23.8 22.3 --------------------------------------------------------------------- Operating Earnings $39.7 $36.4 ---------------------------------------------------------------------
Under Canadian GAAP, this financial measure does not have a standardized meaning and, therefore is unlikely to be comparable to similar measures presented by other issuers.
Sales
Three Months Ended
March 31
(millions of dollars) 2005 2004
---------------------------------------------------------------------
Canada $413.6 $328.0
U.S. 43.1 37.3
Mexico 31.2 28.5
Europe 41.6 36.8
---------------------------------------------------------------------
Total external sales $529.5 $430.6
Total sales were $529.5 million for the first quarter, an increase of $98.9 million or 23.0%, compared to sales of $430.6 million generated in 2004. The increase in sales is due to a combination of net new business awarded and net volume increases on existing automotive programs, offset by the impact of the stronger Canadian dollar. The stronger Canadian dollar had the effect of lowering sales in the quarter by approximately $19.8 million. Excluding the estimated effect of the stronger Canadian dollar on exchange rates, revenues would have increased by 27.6% in the quarter.
Industrial product sales increases in the first quarter of 2005 were driven by the aerial lift platform business as well as growth in marine and power generation precision machined components.
Vehicle Production Volumes
North American vehicle production units used by Linamar for the determination of the company's content per vehicle (see table below) include medium and heavy truck volumes. European vehicle production units exclude medium and heavy trucks.
North American vehicle production volumes for the first quarter of 2005 were approximately 4.1 million units, a decrease from 4.2 million units in 2004.
European vehicle production decreased by 4.9% with approximately 4.1 million units produced in the quarter compared with approximately 4.3 million units produced in 2004.
Automotive Sales
Automotive sales in the following discussion are based on content per vehicle determined by the final vehicle production location and, as such, there are differences in the figures as reported under the North American Automotive Systems segment which is based primarily on the company's location of manufacturing. These differences are the result of products being sold directly to one continent but the final vehicle being assembled on another continent. It is necessary to show the sales based on the vehicle build location to provide accurate comparisons to the production vehicle units for each continent.
Total automotive sales for North America and Europe were $429.8 million for the first quarter of 2005, compared to $347.1 million in the same period of 2004, an increase of 23.8%. The impact of the stronger Canadian dollar accounted for approximately $19.0 million in total automotive revenue reductions for the quarter. If the estimated impact of the stronger dollar is removed, total automotive revenues for the quarter would have increased $101.7 million or 29.3%.
The increases in Linamar automotive revenues are the result of 2004 launch programs reaching full production levels, net of anticipated volume reductions and programs ending.
Content Per Vehicle (i) North America 2005 2004 % Change --------------------------------------------------------------------- Vehicle Production Units (ii) 4.10 4.24 (3.2)% Automotive Sales (iii) $377.4 $307.1 22.9% Content Per Vehicle $92.03 $72.50 26.9% --------------------------------------------------------------------- Europe 2005 2004 % Change --------------------------------------------------------------------- Vehicle Production Units (ii) 4.05 4.26 (4.9)% Automotive Sales (iii) $31.5 $32.8 (3.9)% Content Per Vehicle $7.79 $7.70 1.2%
(i) Measured as the amount of Linamar automotive sales dollars per vehicle, not including tooling sales
(ii) Vehicle Production Units are shown in millions of units
(iii) Automotive Sales are shown in millions of dollars
In the first quarter of 2005 North American automotive sales increased by 22.9% over 2004 to $377.4 million. North American vehicle production units decreased 3.2%. Content per vehicle was $92.03, compared to $72.50 for 2004, an increase of 26.9%.
North American automotive sales benefited from the ramping up of a number of new and expanding programs. Four significant programs which continued to contribute in the quarter were the Caterpillar Inc. ("CAT") iron cylinder head programs, the DaimlerChrysler ("DCX") ATX differential cases, the General Motors Corporation ("GM") Gen IV connecting rod, and DCX 9.25 carrier. The CAT programs are used on medium and heavy truck applications while the DCX components are a light vehicle application. These programs were launched prior to 2005.
In the first quarter of 2005, European automotive sales were $31.5 million compared to $32.8 million in 2004, a decrease of 3.9%, consistent with the production decrease of 4.9%. Content per vehicle grew to $7.79, a modest increase of 1.2% over 2004 of $7.70.
European automotive sales were negatively impacted by a decline in equivalent engines produced for Renault in Mexico and the completion of the Audi camshaft program in Germany. Offsetting this decline were volume increases and new business awards from other existing customers.
Automotive tooling sales for the quarter increased over 2004 by $13.9 million from $6.4 million to $20.3 million. This increase is primarily due to the DCX ATX differential case, the new GM 3.7L output shaft, the Eaton Corporation ("Eaton") 8.6 differential case, and various new programs for Allison Transmission.
Other Sales
Industrial product sales showed continued growth during the quarter, primarily due to the sale of Skyjack's aerial lift platforms, reaching $76.2 million compared to $60.2 million in the first quarter of 2004. The majority of Skyjack's sales are in the North American market with the European market representing 11.7% of its sales in the quarter. Skyjack has also developed a reconditioning division during 2004 where machines of various makes from all manufacturers are reconditioned and returned to the rental market for fleet use.
Gross Margin
Three Months Ended
March 31
(millions of dollars) 2005 2004
---------------------------------------------------------------------
Sales $529.5 $430.6
Cost of Sales 432.9 343.9
Amortization 33.1 28.0
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Gross Margin $63.5 $58.7
---------------------------------------------------------------------
Gross Margin Percentage 12.0% 13.6%
---------------------------------------------------------------------
Gross margin after amortization was 12.0% for the quarter, a decline from 13.6% in the first quarter of 2004 and 12.8% for the 2004 year. The change in margin is largely due to the impact of higher material content machining and assembly programs and increased tooling programs in the quarter. The largest material content machining program impact was the addition of the DCX ATX differential case. Assembly programs, such as the CAT C7 and C9 medium duty cylinder heads launched mid year in 2004, generally carry a higher material content than a typical machining program. Skyjack also experiences higher material content compared to the core machining business; the growth in their sales has an impact on the gross margin percentage.
Labour as a percent of sales has improved as programs such as the highly automated DCX ATX and the Ford Motor Company ("Ford") V10 cylinder heads, both launched in 2004, reached full volumes in 2005. Offsetting these labour gains are the impacts of labour costs associated with preparing to launch 2005 programs such as Detroit Diesel Corporation and Cummins Inc. shafts and the DCX 3.7L crankshafts. Furthermore, growth in the industrial reconditioning area has resulted in slightly increased labour rates as the business expands to service customer owned units in addition to the reconditioning and reselling business.
Amortization charges increased $5.1 million in the quarter over the first quarter of 2004. However as a percent of sales, amortization declined from 6.5% to 6.2% in the first quarter of 2004 to the first quarter of 2005. As a percentage of assets employed, amortization costs increased from 4.5% to 4.7%. The dollar value of assets in production has increased over the same quarter in 2004 by $75.7 million as more programs come online for production. The improvement, relative to sales, reflects the volume increase on the larger programs launched in 2004 such as the DCX ATX differential case, the new Ford V10 and expanded volumes on the V8 cylinder head, the CAT volumes and the DCX 9.25 carrier program.
Three Months Ended
March 31
(millions of dollars) 2005 2004
---------------------------------------------------------------------
Gross Margin $63.5 $58.7
Selling, general and administrative 23.8 22.3
---------------------------------------------------------------------
Operating Earnings $39.7 $36.4
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Selling, general and administrative ("SG&A") costs, excluding currency exchange impacts, remained consistent at $23.6 million in 2005, compared to $23.2 million in the first quarter of 2004. As a percentage of sales, SG&A costs were lower at 4.5% as compared to 5.4% in the same quarter of 2004. Core Linamar facilities (excluding Skyjack) recorded SG&A costs of $18.7 million or 4.0% of sales to date in 2005, compared to $18.2 million or 4.8% of sales for the first quarter of 2004. The main factor behind the SG&A dollar amount increase is the company's continued growth of the internal sales force and the collection of debts previously allowed for by Linamar Hungary RT ("Linamar Hungary").
The nature of the industrial business generally requires a higher level of marketing and sales efforts as compared to the automotive business as Skyjack directly markets and distributes its products to the end users. For the first quarter of 2005, Skyjack had SG&A expenses totaling $4.9 million, excluding exchange - consistent with 2004 levels. As compared to sales, Skyjack has mitigated SG&A spending to a level of 7.4% as compared to 9.6% in 2004.
The company experienced exchange losses during the quarter of $0.2 million as compared to a gain of $1.0 million in the first quarter of 2004. During the quarter a one time conversion of Canadian funds to U.S. dollars resulted in an exchange loss. Offsetting the loss in Canada were gains in Linamar Hungary and the Mexican facilities. Linamar Hungary holds Euro denominated debt which affords a much lower interest rate than funds borrowed in Hungarian Forints. New and growing business at Linamar Hungary is also Euro-based. As the Hungarian Forint has weakened against the Euro, the company experienced exchange losses in 2005 on a net Euro debt position but these losses were offset by exchange gains on net Pound Sterling and U.S. dollar positions. The Mexican subsidiaries have receivables denominated in U.S. dollars in excess of U.S. dollar liabilities. With the weakening Peso, the Mexican operations had experienced gains related to these accounts in 2005.
During the prior two years, the company placed forward contracts to buy U.S. dollars, effectively locking in gains on forward contracts. This transaction resulted in cash proceeds of $4.9 million in 2004 and $30.5 million in 2003. The gains have been deferred and have been amortized to revenue based on the terms of the original underlying contracts. To date during 2005, $2.3 million of these gains were recognized, leaving $6.9 million to be amortized during the remainder of 2005.
INCOME BY SEGMENT
The following should be read in conjunction with Note 21 to Linamar's consolidated financial statements for the financial year ended December 31, 2004.
Operational
During 2004, the Industrial group, which is primarily comprised of the aerial lift platform business, became a quantified reportable segment. The corporate headquarters and other small operating entities are now reported in the North American Automotive Systems segment.
First quarter sales for the North American Automotive Systems segment recorded an increase of $82.9 million or 23.8% from $347.7 million to $430.6 million for 2005. The impact of the declining U.S. dollar against the Canadian dollar and the Mexican Peso is estimated to represent a sales reduction of approximately $18.3 million for the quarter, such that revenues would have otherwise increased by $101.2 million or 29.1% on a consistent exchange rate basis. The programs with the largest impact for the quarter have been the ramp up of the DCX ATX differential case, the DCX 9.25 carrier, the continued growth with CAT programs, the new Ford V10 and increased volumes on the Ford V8 cylinder heads, and the GM Gen IV connecting rod program.
Operating earnings increased by 4.0% in the North American Automotive Systems segment to $33.6 million from $32.3 million in quarter one of 2004. Gains have been made as a result of programs launched in 2004 such as the DCX ATX differential case, Ford V8 and V10 cylinder heads, and the GM Gen IV connecting rod programs reaching full production volumes and achieving efficient operating results. Linamar de Mexico S.A. de C.V. ("LdM") has experienced losses in the quarter due to launch costs associated with a new program currently being launched, the Eaton 8.6 differential case. Shipments to the customer are expected to begin in the second quarter. A number of new programs have entered the start-up phase, slowing earnings growth in the first quarter of 2005. For example, new engine block and cylinder head programs are launching for GM as well as a DCX 3.7L crankshaft program and several cam shaft and differential case programs. Most of this quarter's tooling sales occurred in the North American Automotive Systems segment but contributed minimal amounts to operating earnings.
European sales for the first quarter of 2005 increased $2.8 million to $33.9 million from $31.1 million in the same quarter of 2004. Gains were made in existing automotive programs such as Bosch pumps, as well as sales of products used in industrial applications such as generators and elevators. The agriculture sales at Linamar Hungary also showed growth of $1.7 million over 2004 quarter one levels.
Europe achieved an operating loss of $0.3 million as compared to a loss of $1.2 million for 2004. Improvements were noted in the latest European acquisition, Linamar Antriebstechnik ("LAT"), where subcontract costs were reduced during the quarter as compared to last year. The recovery of amount owing previously allowed for as well as volume and product mix changes contributed to improved results at Linamar Hungary.
Sales for the Industrial segment increased $13.2 million to $65.0 million for the first 2005 quarter, related entirely to increased sales of Skyjack aerial lift platforms.
Operating earnings in the Industrial segment improved in the first quarter as compared to 2004 by $1.1 million or 20.8%. The results in this segment improved due to increased sales volumes and the continued efforts to reduce operating and selling costs at Skyjack.
Geographical
Canadian sales for the first quarter of 2005 were up $85.6 million to $413.6 million. Programs launched during 2004 such as the DCX ATX differential case, the DCX 9.25 carrier, the GM Gen IV connecting rod and the Ford V10 cylinder head have reached full production volumes in the quarter as compared to 2004 volumes. Skyjack continued to experience growth in both new unit and parts sales.
Operating earnings for the Canadian segment increased $5.1 million to $36.0 million in 2005 as compared to the same quarter of 2004. The growth can be attributed to the production volumes and efficiencies gained near the end of 2004 through the first quarter of 2005 on a number of programs, including the CAT programs, the DCX ATX differential case, the GM Gen IV connecting rods and the Ford V8 and V10 cylinder head programs. The increased sales experienced by the Skyjack operation have also contributed to better operating earnings through a higher absorption of fixed costs inherent with the industrial business. Offsetting some of the gains was the expected under utilization of resources occurring during the launch of a number of programs including the 9.25 carrier programs for DCX, LS7 and LC3 engine block and cylinder head programs for GM and the DCX 3.7L crankshaft. Many Ontario facilities are also preparing for the launch of components for the Ford 6R transmission later this year.
Sales in the U.S. segment increased $5.7 million to $43.1 million to date in 2005. The increase relates to increased demand for Skyjack equipment, parts and service. Eagle Manufacturing LLC ("Eagle") experienced sales growth on programs such as the International Truck and Engine Corporation bedplate program launched in 2003 and new programs commencing during the quarter.
Operating earnings in the U.S. segment have improved slightly by $0.3 million for the first quarter to $4.3 million as a result of cost improvements and increased sales volumes at Skyjack. McLaren Performance Technologies Inc. has experienced external market declines, impacting their earnings. Eagle has experienced slightly improved earnings as the plant nears the end of their transition to bedplate production replacing cylinder head program which ended in early 2004.
Sales for Mexico have continued to grow in the first quarter of 2005 by $2.8 million to $31.2 million. Industrias de Linamar S.A de C.V experienced higher pricing from Renault for reduced volumes on equivalent engines. Programs launched near the end of 2003 for GM and CAT contributed to the 2005 sales growth on a comparative basis. LdM began the launch of the Eaton 8.6 differential case program in the second half of 2004 and is realizing sales on that program in 2005; however, low volumes on GM transmission components have caused a sales decline for the facility in the quarter.
Operating earnings for the Mexican segment in the first 2005 quarter have declined by $2.1 million to a loss of $0.9 million as compared to earnings of $1.2 million in 2004. In 2005, the new programs for CAT and GM have reached more efficient operational levels. LdM has experienced volume reductions in GM transmission component sales in addition to the launch of the Eaton 8.6 differential case along with higher material costs and freight cost on the Eaton 11.5 differential case. Shipments of the Eaton 8.6 are expected to start in the second quarter of 2005.
Sales in Europe were $41.6 million, an increase of $4.8 million over the first quarter of 2004. Skyjack's European operations and the growing volumes on programs such as the Robert Bosch GmbH ("Bosch") pump program and various industrial products manufactured at Linamar Hungary are the more significant contributors to the sales growth.
Operating earnings in the European segment have remained consistent at $0.3 million. Skyjack Europe experienced exchange gains in 2004 with no significant exchange impact in 2005 results. LAT has been able to reduce subcontracting costs and has launched production of a new camshaft program. Linamar Hungary has realized a small gain on amounts collected which were previously provided for combined with overall sales volume increases, thereby improving operating earnings.
NET EARNINGS AND BALANCE SHEET DATA
The following financial data has been derived from, and should be read in conjunction with, Linamar's audited consolidated financial statements for the financial years ended December 31, 2004 and 2003.
Three Months Ended
March 31
(millions of dollars, except per share amounts) 2005 2004
---------------------------------------------------------------------
Sales $529.5 $430.6
Gross Margin 63.5 58.7
Operating Earnings 39.7 36.4
Net interest expense (4.0) (2.8)
Dilution loss - (0.2)
Other income 0.1 0.4
Provision for Income Taxes (12.9) (11.7)
Non-Controlling Interests (0.5) (0.4)
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Earnings from Continuing Operations $22.4 $21.7
Results of Discontinued Operations - (1.5)
---------------------------------------------------------------------
Net Earnings for the Year $22.4 $20.2
---------------------------------------------------------------------
Earnings Per Share From Continuing Operations
Basic $0.32 $0.31
Diluted 0.32 0.31
Net Earnings Per Share
Basic $0.32 $0.29
Diluted 0.32 0.29
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Total Long-Term Liabilities $362.1 $207.8
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Cash Dividends declared per share 0.06 0.04
---------------------------------------------------------------------
Total Assets $1,498.3 $1,365.6
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Net Earnings and Earnings per Share
The effective tax rate for the first quarter of 2005 was 36.0%, an increase from 34.7% in the first quarter of 2004 and 29.9% for the 2004 year. The effective tax rate was impacted by the results generated by operations in Mexico and Hungary. Certain Mexican facilities have experienced losses in the quarter which have not been tax affected. While other Mexican operations have earnings which are taxed at an effectively higher rate as the result of government regulated profit sharing taxes. The Hungarian operations enjoy the benefit of a tax holiday through a tax credit system which management expects will continue until 2011.
During 2004, the company has also recognized the benefit of Canadian Scientific Research and Experimental Development tax credits which are not subject to provincial taxes in Ontario. As well, during the fourth quarter of 2004, $3.6 million was recognized in relation to certain asset taxes, loss carry forwards and timing differences for the Mexican facilities. Removing this impact, the 2004 annual rate would have been 32.6%.
Net earnings from continuing operations for the quarter improved $0.7 million to $22.4 million from $21.7 million in 2004. For the quarter, earnings per share from continuing operations were $0.32. The improvement is due to 2004 launch programs reaching full productive volumes and achieving anticipated utilization of program resources net of new programs preparing for 2005 launches.
Interest
During the first quarter, interest on long-term debt increased by $2.3 million over last year to $3.9 million from $1.7 million. The increase is primarily due to the private placement in October of 2004. The effective interest rate was lower in 2004 at 4.4% as compared to 5.2% in 2005 due to the new private placement, increasing LIBOR rates and the drawdown of interest free debt. Offsetting the increases are lower effective rates on Euro debt held by Linamar Hungary. The Euro debt affords a lower rate of interest and assists Linamar Hungary in reducing exchange exposure as the company's Euro based sales grow.
Other interest expense is lower by $0.8 million for the quarter as compared to the first quarter of 2004 reflecting the receipt of the private placement funds in October of 2004. Interest earned has increased slightly over 2004 first quarter levels.
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited information for each of the eight quarters ended June 30, 2003 through March 31, 2005. This information has been derived from our unaudited consolidated financial statements which, in the opinion of management, have been prepared on a basis consistent with the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation of our financial position and results of operations for those periods.
(millions of dollars,
except per share amounts) June 30, Sept 30, Dec 31, Mar 31,
2003 2003 2003 2004
---------------------------------------------------------------------
Sales 368.0 366.8 402.8 430.6
Earnings from Continuing Operations 18.2 14.5 1.0 21.7
Earnings Per Share from Continuing
Operations
Basic 0.26 0.21 0.01 0.31
Diluted 0.26 0.21 0.01 0.31
Net Earnings (Loss) Per Share
Basic 0.24 0.18 (0.02) 0.29
Diluted 0.24 0.18 (0.02) 0.29
(millions of dollars,
except per share amounts) June 30, Sept 30, Dec 31, Mar 31,
2004 2004 2004 2005
Sales 460.6 478.7 474.2 529.5
Earnings from Continuing Operations 24.6 19.8 24.2 22.4
Earnings Per Share from Continuing
Operations
Basic 0.35 0.28 0.34 0.32
Diluted 0.34 0.28 0.34 0.32
Net Earnings (Loss) Per Share
Basic 0.32 0.36 0.34 0.32
Diluted 0.32 0.35 0.34 0.32
The quarterly results of the company are impacted by the seasonality of certain operational units. Earnings in the second quarter are positively impacted by the high selling season for both the aerial lift platform and agricultural businesses. The third quarter is generally negatively impacted by the scheduled summer shutdowns at automotive customers. The company takes advantage of summer shutdowns for maintenance activities that would otherwise disrupt normal production schedules.
The results above have been restated to reflect the sale of the company's 50% interest in Weslin in the third quarter of 2004. The operational results of Weslin and the gain realized on the sale have been reclassified to discontinued operations for all periods reported.
The fourth quarter of 2003 was negatively impacted by the termination of all outside sales agents which cleared the way for the company to build its own internal sales force.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Three Months Ended
March 31
(millions of dollars) 2005 2004
---------------------------------------------------------------------
Cash provided from (used for):
Operating Activities $0.5 $31.9
Financing Activities 24.5 9.4
Investing Activities (45.8) (69.7)
Effect of Translation Adjustment (0.1) 0.4
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Decrease in Cash Position (20.9) (28.0)
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Cash Position - Beginning of Period 12.5 29.3
---------------------------------------------------------------------
Cash Position - End of Period $(8.4) $1.3
---------------------------------------------------------------------
Comprised of:
Cash 21.8 24.5
Unpresented Cheques (30.2) (23.2)
---------------------------------------------------------------------
$(8.4) $1.3
---------------------------------------------------------------------
Linamar's cash position (net of unpresented cheques) at March 31, 2005 was a credit of $8.4 million, a decrease of $9.7 million from the same period in the prior year. Cash from operating activities in the first quarter of 2005 are lower compared to the first quarter of 2004 as sales have increased significantly over the period resulting in an increased accounts receivable balance. Financing activities have increased with the continued use of short-term borrowings of $30.1 million for the first quarter of 2005. This was partially offset by an increased dividend payment of $4.2 million which increased dividends declared to $0.06 from $0.04 per share. Investing activities continue to be dominated by payments for the purchase of property, plant and equipment in 2005 with a larger amount of long-term receivables continuing to be collected or sold under the portfolio purchase agreement signed at the end of 2004.
Operating Activities
Three Months Ended
March 31
(millions of dollars) 2005 2004
---------------------------------------------------------------------
Earnings from continuing operations $22.4 $21.7
Items not involving current cash flows 32.1 29.1
---------------------------------------------------------------------
Cash provided from operations $54.5 $50.8
Net change in non-cash working capital (54.3) (21.0)
Deferred gain - 2.8
---------------------------------------------------------------------
Cash flow - continuing operations $0.2 $32.6
Cash flow - discontinuing operations 0.3 (0.7)
---------------------------------------------------------------------
Cash provided from operating activities $0.5 $31.9
---------------------------------------------------------------------
Cash provided by continuing operations, before the effect of changes in non-cash working capital, increased to $54.5 million in the first quarter of 2005 from $50.8 million in 2004, driven primarily by improved operating results achieved in 2005 and higher amortization. The 2004 results include the receipt of cash proceeds of $2.8 million on U.S. forward contracts crystallized in the first quarter.
Incremental investments in non-cash working capital for the quarter were $54.3 million, compared to $21.0 million for the first quarter of 2004. This increased investment compared to last year resulted primarily from increases in accounts receivable due to higher levels of tooling sales driven by the ramp up of programs following a year of heavy capital spending. This impact was partially offset by a decrease in inventory levels.
Financing Activities
Three Months Ended
March 31
(millions of dollars) 2005 2004
---------------------------------------------------------------------
Proceeds from short-term bank borrowings $30.1 $14.8
Proceeds from long-term debt 0.1 2.2
Repayment of long-term debt (1.5) (4.8)
Dividends to shareholders (4.2) (2.8)
---------------------------------------------------------------------
Cash provided from financing activities $24.5 $9.4
---------------------------------------------------------------------
Financing activities generated $24.5 million in cash during the first quarter of 2005, compared to $9.4 million in 2004.
During the quarter, short term borrowings increased as a result of the continued investment in capital equipment related to launching programs. Short term borrowings in the first quarter of 2004 were the result of additional credit used for acquisitions during 2003. The private placement provided funds of U.S. $120.0 million in October 2004 which was applied to reduce the level of short term borrowings accumulated. Linamar Hungary continues to replace short-term Forint borrowings with long-term Euro debt, reducing financing costs.
The company renewed the revolving term facility under its Canadian syndicated credit agreement for another year during the fourth quarter of 2004. At the end of the quarter, there was $116.2 million in credit available. The non-revolving facility requires that it be fully drawn at all times with $302.0 million Canadian of available credit.
In the first quarter of 2004, additional long term debt was secured by Linamar Hungary.
Stock options were exercised in the first quarter of 2005 for proceeds of $32.4 thousand. The company continued its dividend policy with payments made quarterly on 70,630,476 common shares at a rate of $0.06 per share in 2005 as compared to $0.04 per share in 2004.
Investing Activities
Three Months Ended
March 31
(millions of dollars) 2005 2004
---------------------------------------------------------------------
Payments for purchases of capital assets $(46.1) $(62.2)
Proceeds from disposal of capital assets 1.9 0.1
Investment by minority shareholders - 3.7
Investment in other long-term assets (0.5) (0.7)
Investment in long-term receivables (1.1) (10.3)
Other - (0.3)
---------------------------------------------------------------------
Cash used for investing activities $(45.8) $(69.7)
---------------------------------------------------------------------
As at March 31, 2005, outstanding commitments for capital expenditures under purchase orders and contracts amounted to approximately $93.3 million (2004 - $108.5 million).
Cash spent on investing activities for the first quarter of 2005 totaled $45.8 million while, for 2004, the total spent was $69.7 million exceeding 2005 levels by $16.1 million. During the first quarter in 2005, the company invested in capital equipment for the DCX 3.7L crankshaft program, the Ford 6F program, a new stator shaft and an LCT front for Allison Transmission. These programs account for almost 50% of the initial 2005 investment in capital equipment.
During 2004, the company incurred long term receivables as part of the financing arrangements which are key to success in the aerial lift marketplace.
Financing Resources
At March 31, 2005, cash on hand was $21.8 million, with unpresented cheques and short-term bank borrowings of $110.5 million. At this time, the company's syndicated revolving facility had available credit of $116.2 million. A successful private placement was completed in October 2004, yielding U.S. $120.0 million. In December 2003, the syndicated non-revolving term facility was renewed and increased to $120.0 million, due in December 2006. This facility is fully drawn as required under the credit agreement. Of the company's consolidated long-term debt, 2.3% of the $313.6 million is due and payable in the next 12 months.
Contractual Obligations
Please see the December 31, 2004 annual MD&A for a table summarizing contractual obligations by category.
The balance of purchase obligations(3) is $93.3 million at March 31, 2005, down from $93.7 million at December 31, 2004. Long-term debt and capital lease obligations(4) have not significantly changed during the quarter year-to-date. Transactions for long-term debt include repayments of $1.5 million for the quarter and proceeds of $0.1 million. Short-term debt transactions include proceeds of $30.1 million in accordance with terms similar to those as set out in the annual consolidated financial statements.
(3) "Purchase Obligations" means an agreement to purchase goods or services that is enforceable and legally binding that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.
(4) "Capital Lease Obligations" include the interest component in accordance with the definition of minimum lease payments under GAAP.
Shareholders' Equity
Book Value Per Share3 grew to $10.05 at March 31, 2005, as compared to $9.18 at March 31, 2004. Earnings net of dividends contributed $18.2 million to retained earnings for the quarter. During the quarter 3,000 options were exercised for total proceeds of $32.4 thousand. The number of options outstanding as at March 31, 2005 stands at 3,006,000.
The cumulative translation adjustment has increased slightly by $1.3 million to $37.7 million since December 31, 2004 and represents the unrealized foreign exchange loss on Linamar's net investment in its self-sustaining foreign subsidiaries. This change is predominantly the result of the strengthening Canadian dollar relative to the Hungarian Forint.
Foreign Currency Activities
Linamar pursues a strategy of attempting to balance its foreign currency cash flows, to the largest extent possible, in each region in which it operates but subsequent to negotiations with its customers on those matters. The company's foreign currency cash flows for the purchases of materials and certain capital equipment denominated in foreign currencies are naturally hedged when contracts to sell products are denominated in those same foreign currencies. In an effort to manage the remaining exposure, Linamar employs hedging programs primarily through the use of forward exchange contracts. The contracts are purchased based on the projected foreign cash flows from operations. The company does not hold or issue derivative financial instruments for trading or speculative purposes, and controls are in place to detect and prevent these activities.
The amount and timing of forward contracts is dependent upon a number of factors, including anticipated production delivery schedules, anticipated customer payment dates, anticipated foreign currency costs, and expectations with respect to future foreign exchange rates. Linamar is exposed to credit risk from potential default by counterparties on its foreign exchange contracts and attempts to mitigate this risk by dealing only with Canadian chartered banks. Despite these measures, significant long-term movements in relative currency values could affect the company's results of operations. Linamar does not hedge the business activities of its self-sustaining foreign subsidiaries and, accordingly, results of operations could be further affected by a significant change in the relative values of the Canadian dollar, U.S. dollar, Euro, Hungarian Forint and Mexican Peso.
At March 31, 2005, the company was committed to a series of monthly forward and zero cost option contracts to sell U.S. dollars. As these forward and zero cost option contracts qualify for accounting as cash flow hedges, the unrealized gains and losses are deferred and recognized in the same period as the sales which generate the cash flows.
The company was also committed to a series of monthly forward exchange contracts to sell British pounds and two long-dated forwards to buy U.S. dollars. As these forward exchange contracts qualify for accounting as fair value hedges, they are marked to current exchange rates to offset the exchange gains and losses on the underlying hedged items.
At March 31, 2005, the net unrecognized loss on the U.S. contracts was approximately $3.8 million (December 31, 2004 - $0.7 million gain). The unrecognized net gain on the British pound contracts was approximately $0.1 million (December 31, 2004 - $0.1 million).
(5) "Book Value Per Share" - This measure as used by the chief operating decision makers and management, indicates the value of the company based on the carrying value of the company's net assets. Book value per share is calculated by the company as Shareholders' Equity divided by shares outstanding at quarter-end.
March 31 (in millions of dollars except
share and per share figures)
2005 2004
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Shareholders' Equity $709.5 $648.1
Shares outstanding at quarter-end 70,630,476 70,603,476
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Book Value Per Share $10.05 $9.18
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Under Canadian GAAP, this financial measure does not have a standardized meaning and, therefore is unlikely to be comparable to similar measures presented by other issuers.
During the prior two years, the company placed forward contracts to buy U.S. dollars, effectively locking in gains on forward contracts. This transaction resulted in cash proceeds of $4.9 million for 2004 and $30.5 million in 2003. The gains have been deferred and have been amortized to revenue based on the terms of the original underlying contracts. As at March 31, 2005, the balance remaining to be amortized is $6.9 million.
Off Balance Sheet Arrangements
The company leases transport trucks and trailers through its subsidiaries Linamar Transportation Inc. and Linamar Transportation USA, Inc. These subsidiaries are ISO 9001-2000 registered companies, providing the best possible delivery service to their customers. This arrangement remains unchanged at March 31, 2005.
There were no significant changes during the quarter year-to-date of the contractual obligations described in the December 31, 2004 annual MD&A. Please see the annual MD&A for the table summarizing contractual obligations including the above leases for transport trucks and trailers. Also, please see the notes to the annual consolidated financial statements for a total by year of the company's various operating leases, including transport trucks and trailers, office equipment, computers, fork trucks, and other such items.
Guarantees
Linamar is a party to certain financial guarantees as disclosed in Note 10 of the March 31, 2005 interim consolidated financial statements. The company is also exposed to certain financial guarantees and contingent liabilities on government assistance as discussed in Notes 13, 22, and 23 of the December 31, 2004 annual consolidated financial statements.
Transactions with Related Parties
Included in the purchase of property, plant and equipment are the construction of buildings, building additions and building improvements in the aggregate amount of $1.3 million (December 31, 2004 - $5.3 million) to Kiwi-Newton Construction Ltd., a company owned by the spouse of an officer and a director. Cost of sales contain maintenance costs of $0.4 million (December 31, 2004 - $0.7 million) by the same company. Selling, general and administrative expenses include a recovery of approximately $Nil (December 31, 2004 - $0.1 million) related to equipment and services sold to the same company. On a periodic basis the company entertains a closed-bid process to ensure that it receives the best price for the work done by a related party.
Lease costs, included in cost of sales, of $0.1 million (December 31, 2004 - $0.3 million) related to property leased from a company owned by two directors.
At the end of 2002, certain officers and directors of the company exercised their options in Linamar Hungary subject to government regulatory approval from the Court of Registry in Hungary. During 2004, registration was completed resulting in a dilution of the company's ownership in the subsidiary from 62.8% to 58.6%. No further options are outstanding subsequent to this transaction.
A component of the company's Human Resources and Corporate Governance Committee mandate is to review related party transactions for their fair market value.
Proposed Transactions
The company has no transactions currently proposed as at May 11, 2005.
RISK MANAGEMENT
Please see the December 31, 2004 annual MD&A for a listing of the company's various risks and how these risks are managed. There were no significant changes during the quarter year-to-date of the risks described in the December 31, 2004 annual MD&A.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The company bases its estimates on historical experience and various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. On an ongoing basis, the company evaluates its estimates. However, actual results may differ from these estimates under different assumptions or conditions.
Please see the annual MD&A for the year ended December 31, 2004 for a discussion of critical accounting estimates for the Impairment of Goodwill and Other Intangibles, Future Income Tax Assets and Liabilities, Impairment of Long-Lived Assets, and Stock-Based Compensation. There were no significant changes in the assumptions used and balances of these critical accounting estimates during the quarter year-to-date.
CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTIONS
The following accounting policies and pronouncements were adopted during the quarter ended March 31, 2005:
In 2003, the CICA issued Accounting Guideline, AcG-15 "Consolidation of Variable Interest Entities" ("AcG-15"). AcG-15 requires that all companies comply with the new Guideline for years beginning on or after November 1, 2004. The company adopted the new guideline effective January 1, 2005. AcG-15 sets out criteria for identifying variable interest entities and further establishes criteria to determine which entity, if any, should consolidate them. AcG-15 conforms Canadian GAAP with U.S. GAAP as it applies to variable interest entities. The company consolidates all of its subsidiaries. The adoption and compliance with AcG-15 has not had an effect on the company's financial condition.
The following accounting pronouncements will be adopted by the company after March 31, 2005:
a) In 2005, the CICA issued Handbook Section 1530 "Comprehensive Income" ("CICA 1530"). CICA 1530 requires that all companies comply with the new Handbook Section for fiscal years beginning on or after October 1, 2006. Companies adopting this Section for a fiscal year beginning before October 1, 2006 must also adopt CICA 3251 "Equity", CICA 3855 "Financial Instruments - Recognition and Measurement", CICA 3861 "Financial Instruments - Disclosure and Presentation", CICA 3865 "Hedges", CICA 3051 "Investments", and CICA 1651 "Foreign Currency Translation". CICA 1530 requires companies to present comprehensive income and its components, as well as net income, as a separate and distinct financial statement. Comprehensive income is the change in equity of an enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. A component of comprehensive income is other comprehensive income which comprises of revenues, expenses, gains and losses, in accordance with primary sources of GAAP. Comprehensive income will include exchange gains and losses arising from the translation of the financial statements of the company's self-sustaining foreign operations (as per CICA 1651 "Foreign Currency Translation" below), gains and losses arising from changes in the fair values of available-for-sale financial assets (as per CICA 3855 "Financial Instruments - Recognition and Measurement" below), and the change in fair values of effective cash flow hedging instruments (as per CICA 3865 "Hedges" below). Other than presentation and disclosure, the adoption of CICA 1530 is not expected to have an effect on the company's consolidated financial condition.
b) In 2005, the CICA reissued Handbook Section 3251 "Equity" ("CICA 3251") replacing Handbook Section 3250 "Surplus". CICA 3251 requires that all companies comply with the new Handbook Section for fiscal years beginning on or after October 1, 2006. Companies adopting this Section for a fiscal year beginning before October 1, 2006 must also adopt CICA 1530 "Comprehensive Income", CICA 3855 "Financial Instruments - Recognition and Measurement", CICA 3861 "Financial Instruments - Disclosure and Presentation", CICA 3865 "Hedges", CICA 3051 "Investments", and CICA 1651 "Foreign Currency Translation". CICA 3251 establishes standards for the presentation of equity and changes in equity during the reporting period. The main feature of this section is a requirement for an enterprise to present separately each of the changes in equity during the period, including accumulated other comprehensive income, as well as components of equity at the end of the period. Other than disclosure, the adoption of CICA 3251 is not expected to have an effect on the company's consolidated financial condition.
c) In 2005, the CICA issued Handbook Section 3855 "Financial Instruments - Recognition and Measurement" ("CICA 3855"). CICA 3855 requires that all companies comply with the new Handbook Section for fiscal years beginning on or after October 1, 2006. Companies adopting this Section for a fiscal year beginning before October 1, 2006 must also adopt CICA 1530 "Comprehensive Income", CICA 3251 "Equity", CICA 3861 "Financial Instruments - Disclosure and Presentation", CICA 3865 "Hedges", CICA 3051 "Investments", and CICA 1651 "Foreign Currency Translation". CICA 3855 establishes standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives. CICA 3855's primary items or changes include: financial assets are now classified as held for trading, held to maturity, loans and receivables, or available for sale; almost all derivatives, including embedded derivatives that are not closely related to the host contract, are classified as held for trading; financial assets and financial liabilities held for trading are measured at fair value with gains and losses recognized to net income in the periods in which they arise, unless they are part of a hedging relationship; financial assets held to maturity, loans and receivables, and financial liabilities other than those held for trading, are measured at amortized cost; financial assets available for sale are measured at fair value with gains and losses recognized to other comprehensive income until the financial asset is derecognized or becomes impaired; investments in equity instruments that do not have a quoted market price in an active market, other than those held for trading, are measured at cost; an company may elect on initial recognition to measure any financial instrument at fair value with gains or losses recognized in net income in the periods in which they arise. The adoption of CICA 3855, based on its new recognition standards, is expected to have an effect on the company's consolidated financial condition but that effect has yet to be quantified.
d) In 2005, the CICA reissued Handbook Section 3861 "Financial Instruments - Disclosure and Presentation" ("CICA 3861") replacing CICA 3860. CICA 3861 requires that all companies comply with the new Handbook Section for fiscal years beginning on or after October 1, 2006. Companies adopting this Section for a fiscal year beginning before October 1, 2006 must also adopt CICA 1530 "Comprehensive Income", CICA 3251 "Equity", CICA 3855 "Financial Instruments - Recognition and Measurement", CICA 3865 "Hedges", CICA 3051 "Investments", and CICA 1651 "Foreign Currency Translation". CICA 3861 establishes standards for accounting policy disclosures, a description of risk management objectives and policies, and sets standards for disclosures about fair value and hedges of anticipated future transactions. Other than disclosure, the adoption of CICA 3861 is not expected to have an effect on the company's consolidated financial condition.
e) In 2005, the CICA issued Handbook Section 3865 "Hedges" ("CICA 3865"). CICA 3865 requires that all companies comply with the new Handbook Section for fiscal years beginning on or after October 1, 2006. Companies adopting this Section for a fiscal year beginning before October 1, 2006 must also adopt CICA 1530 "Comprehensive Income", CICA 3251 "Equity", CICA 3855 "Financial Instruments - Recognition and Measurement", CICA 3861 "Financial Instruments - Disclosure and Presentation", CICA 3051 "Investments", and CICA 1651 "Foreign Currency Translation". CICA 3865's primary items or changes include: the previous guidance as provided in the withdrawn AcG-13 "Hedging Relationships" section; hedges are designated as either fair value hedges, cash flow hedges or hedges of a net investment in a self-sustaining foreign operations; for fair value hedges, the gain or loss from remeasuring a derivative hedging item at fair value or, for a non-derivative hedging item, from remeasuring the foreign currency component of its carrying amount, is recognized in net income in the period of change together with the offsetting loss or gain on the hedged item attributable to the hedged risk. The carrying amount of the hedged item is adjusted for the effect of the hedged risk; for cash flow hedges and a hedge of a net investment in a self-sustaining foreign operation, the effective portion of the hedging item's gain or loss is initially reported in other comprehensive income and subsequently reclassified to net income when the offsetting loss or gain on the hedged item affects net income; and new disclosures about the company's accounting for designated hedging relationships. The adoption of CICA 3865, based on its new recognition standards, is expected to have an effect on the company's consolidated financial condition but that effect has yet to be quantified.
f) In 2005, the CICA reissued Handbook Section 3051 "Investments" ("CICA 3051") replacing Handbook section 3050 "Long-Term Investments". CICA 3051 requires that all companies comply with the new Handbook Section for fiscal years beginning on or after October 1, 2006. Companies adopting this Section for a fiscal year beginning before October 1, 2006 must also adopt CICA 1530 "Comprehensive Income", CICA 3251 "Equity", CICA 3855 "Financial Instruments - Recognition and Measurement", CICA 3861 "Financial Instruments - Disclosure and Presentation", CICA 3865 "Hedges", and CICA 1651 "Foreign Currency Translation". CICA 3051 requires portfolio investments be accounted for in accordance with new Handbook Section CICA 3855. CICA 3051 outlines that an other-than-temporary decline in value of an investment occurs when there is a significant or prolonged decline in the fair value of an investment below its carrying value and this is evidence of an other-than-temporary loss in value of an investment. Other than additional guidance, the adoption of CICA 3051 is not expected to have an effect on the company's consolidated financial condition.
g) In 2005, the CICA issued Handbook Section 1651 "Foreign Currency Translation" ("CICA 1651") replacing CICA 1650 "Foreign Currency Translation". CICA 1651 requires that all companies comply with the new Handbook Section for fiscal years beginning on or after October 1, 2006. Companies adopting this Section for a fiscal year beginning before October 1, 2006 must also adopt CICA 1530 "Comprehensive Income", CICA 3251 "Equity", CICA 3855 "Financial Instruments - Recognition and Measurement", CICA 3861 "Financial Instruments - Disclosure and Presentation", CICA 3865 "Hedges", and CICA 3051 "Investments". CICA 1651 requires companies to include, as a component of other comprehensive income, the exchange gains and losses arising from the translation of the financial statements of the company's self-sustaining foreign operations. The effect on the company's financial position is the reclassification of the cumulative translation adjustment from the balance sheet to comprehensive income.
OUTSTANDING SHARE DATA
Linamar is authorized to issue an unlimited number of common shares, of which 70,630,476 common shares were outstanding as of May 11, 2005. As of May 11, 2005, options to purchase 3,006,000 common shares were outstanding under Linamar's share option plan.
OUTLOOK
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 10-15% in North America and 5-10% in Europe.
Sales growth projections are based on program launches which include transmission business (such as differential cases for DCX and Eaton, WK transmission carriers and differential cases, Ford 6R and 6F transmission components, other transmission carriers, as well as output and coupler shafts), engines business (such as 3.7L crankshafts, 4.0L, 3.5L, 3.9L and Gen IV and NG6 camshafts, 6.1L engine block, 3.5L V6 heads, blocks and camshafts), and continued strength in the industrial products category. Linamar also supplies the medium and heavy truck markets. In 2004, these markets recovered significantly, fueling expectations for continued strength in 2005 and beyond 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. The earnings expectation also assumes that the progress made in the past several years in Mexico will be maintained, and on-going performance will show improvement. Earnings growth anticipates that LAT will launch and ramp up its camshaft and cylinder head & block programs turning that business from losses in 2004 and 2005 to profitable performance beginning in 2006. The remaining European business based in Hungary will steadily grow in both sales and earnings as programs with Denso Corporation and Delphi Corporation (common rails and hydraulic manifolds), Bosch (pump housing) and Honeywell International (turbo housings) take effect in the automotive sectors. Industrial and agricultural business also show some growth. Other Linamar Hungary product areas remain difficult to forecast and predict because markets can be affected by the presence or lack of government subsidies available to purchasers (i.e. agriculture), the success of customer products in very competitive markets (i.e. construction equipment) or market acceptance of new customer technologies (i.e. ATI vehicle track systems).
In the company's industrial products business, which is comprised of Linamar's Skyjack operations, the market remains highly competitive. The construction equipment market rebounded in 2004 and the expectation is that the market will remain strong through 2005 and beyond, provided current economic conditions continue. In 2004, strong sales growth for Skyjack occurred not only in North America but also in the United Kingdom and the rest of Europe. Performance by market is very difficult to predict. The significant increase in Skyjack sales in 2004 over 2003 is expected to moderate somewhat in 2005 as the market will remain strong although growth will increase at a slower rate.
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, in 2005, 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 Motor Corporation's Production System.
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 OEMs 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.
A key factor in Linamar'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.
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. The company also employs a hedging strategy for net U.S. dollar positive cash flow.
FORWARD LOOKING INFORMATION
Certain information provided by Linamar in this MD&A in the Quarterly and Annual Reports and other documents published throughout the year that are not recitation of historical facts may constitute forward-looking statements. The words "may", "would", "could", "will", "likely", "estimate", "believe", "expect", "plan", "forecast" and similar expressions are intended to identify forward-looking statements. Readers 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 of the factors and risks and uncertainties that cause results to differ from current expectations discussed in this MD&A and elsewhere in the Quarterly and Annual Reports include, but are not limited to, changes in the various economies in which Linamar operates, fluctuations in interest rates, environmental emission and safety regulations, the extent of OEM outsourcing, industry cyclicality, trade and labour disruptions, world political events, 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, technological developments by Linamar's competitors, governmental, environmental and regulatory policies and changes in the competitive environment in which Linamar operates.
The foregoing is not an exhaustive list of the factors that may affect Linamar's forwarding looking statements. These and other factors should be considered carefully and readers should not place undue reliance on Linamar's forward-looking statements. 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.
The quarterly results of the company are impacted by the seasonality of certain operational units. Earnings in second quarter are positively impacted by the high selling season for both the general lift platform and agricultural businesses. The third quarter is generally negatively impacted by the scheduled summer shut downs at Linamar's automotive customer's facilities. The company takes advantage of summer shut downs for maintenance activities that would otherwise disrupt normal production schedules.
FOR FURTHER INFORMATION PLEASE CONTACT:
Linamar Corporation
Linda Hasenfratz
(519) 836-7550
Linamar Corporation
Keith Wettlaufer
(519) 836-7550
