GUELPH, ONTARIO--(CCNMatthews - May 10, 2006) - Linamar Corporation (TSX:LNR) ("Linamar" or "the company"), a global supplier who designs, develops and manufactures precision machined components, modules and systems for engine, transmission, chassis and industrial applications primarily for the North American, European and Asia Pacific automotive marketplace, today announced its financial results for the first quarter ended March 31, 2006.
(CDN dollars in thousands except per share figures) Three Months Ended March 31 2006 2005 --------------------------------------------------------------------- $ $ Sales 583,348 529,474 Gross Margin 75,953 63,362 Operating Earnings(1) 45,622 39,568 Earnings from Continuing Operations 26,038 22,405 Net Earnings 25,838 22,405 --------------------------------------------------------------------- Diluted Earnings per Share from Continuing Operations 0.36 0.32 Diluted Earnings per Share 0.36 0.32 ---------------------------------------------------------------------
First Quarter Operating Highlights
In the first quarter, sales increased by 10.2% to $583.3 million compared to $529.5 million in the same quarter last year.
Sales for the dominant North American Automotive Systems operating segment increased $23.9 million or 5.6% to 454.2 million. Contributing to the growth was an increase of 4.4% in North American vehicle production over the first quarter of 2005 and particular growth in medium and heavy duty cylinder head programs, various transmission component programs launched in the prior year, engine block and cylinder head programs for high performance vehicle and connecting rod programs.
(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. Three Months Ended March 31 2006 2005 --------------------------------------------------------------------- $ $ Gross margin 75,953 63,362 Selling, general and administrative 30,331 23,794 --------------------------------------------------------------------- Operating earnings 45,622 39,568 --------------------------------------------------------------------- Under Canadian generally accepted accounting principles (GAAP), this financial measure does not have a standardized meaning and is unlikely to be comparable to similar measures presented by other issuers.
In Europe, Linamar's first quarter automotive sales declined by a moderate 3.2%, primarily due to reduced sales of automotive products for a European customer. This is largely mitigated by volume increases in various transmission programs. Despite the decline in sales, operating results improved from a loss of $0.3 million in the first quarter of 2005 to a profit of $0.7 million in 2006.
Content per vehicle for the quarter in North America grew 5% to $96.59, and European content experienced a modest 2.3% decline to $7.65 compared to the first quarter of 2005. Asia Pacific registered content of $0.32 for the quarter.
The Industrial segment experienced significantly higher sales volumes over 2005, resulting in first quarter sales of $95.7 million. This reflects an ongoing strong market for aerial work platforms. Operating earnings for the first quarter for this segment improved in 2006 to $12.8 million as compared to $6.4 million in 2005.
On a geographic segmented basis, Canadian segmented sales for the quarter have increased 6.2% or $25.6 million to $438.9 million from $413.3 million a year earlier. Volume increases on transmission components and heavy and medium duty cylinder heads continue to lead revenue increases, offsetting anticipated declines on certain differential case programs. Some programs, previously consigned, moved to purchased material contracts driving a parallel increase in sales and cost of sales. Market demand for aerial work platforms through fleet replacements and reconditioning services of industrial products have also contributed to the significant growth.
The operating earnings for the Canadian segment declined slightly over the first quarter of 2005 to $34.2 million. Volume increases on existing programs, including medium and heavy duty cylinder heads, along with the many new jobs launched over the past year, continue to outpace planned production decreases for programs such as a differential case, however, costs were incurred during the quarter for the launch of a significant camshaft program. This program is not expected to reach full volumes until 2007.
The U.S. geographic segment recorded a 24.1% increase in sales, reaching $53.5 million during the quarter, an increase of $10.4 million over 2005. An increase in sales to the U.S. customers of Skyjack was driven by market demand. Sales have also increased for the bedplate program through both volume and improved pricing.
Operating earnings for the U.S. segment have more than doubled in the quarter to $10.0 million from $4.3 million in 2005, reflecting the sales levels and strong margin contribution for aerial work platforms.
Sales in the Asia Pacific geographic group reached $0.6 million for the quarter with an operating loss of $0.8 million. This reflects the company's entrance into the Asian automotive parts market through the establishment of operations in China.
Mexican sales demonstrated significant strength, achieving $44.7 million during the first quarter of 2006, a 43.3% increase or $13.5 million over the same quarter in 2005. This is primarily due to a differential case program reaching anticipated volumes. Volume increases were also experienced on the medium and heavy duty cylinder head programs and certain transmission components. New programs were launched for anchor plates during the quarter.
Operating earnings in Mexico have turned a profit of $0.4 million as compared to a loss of $1.1 million in the first quarter of 2005. Improvements are attributed to the steady volumes achieved after many delays on a differential case program, net of the launch costs associated with new programs such as the anchor plates.
Sales in Europe increased $4.0 million or 9.6% to $45.6 million year to date. This increase includes various automotive components such as a fuel rail in Hungary and heads and blocks in Germany. Sales to industrial customers have also grown significantly as compared to 2005 levels.
European operating earnings have increased $1.5 million to $1.8 million from $0.3 million in 2005. Earnings in the quarter have been driven by the improvement in both automotive and industrial sales.
The Board of Directors today declared a dividend in respect to the quarter ended March 31, 2006 of CDN$0.06 per share on the common shares of the company, payable on or after June 8, 2006 to shareholders of record on May 26, 2006.
In 2006, Linamar anticipates continuing uncertainty in the automotive market, particularly with respect to the North American OEMs and, as a result, expects only moderate growth in sales and earnings. The company is expecting to launch new programs, as well as see existing programs achieve their anticipated levels of production in 2006. Growth in content per vehicle for 2006 for both North America and Europe is forecasted at 0-5%. While the Asia Pacific market is expected to grow in 2006, it will continue in start-up and is not expected to be profitable in 2006.
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. A key factor in the company's future results 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.
In the company's industrial products business, which is comprised mainly of Linamar's Skyjack operations, the market is expected to remain highly competitive throughout 2006 as a series of large projects commence construction. This may be offset partially by an expected cooling off in the residential market during the same period. Growth in the European construction market is expected to gain momentum, allowing Skyjack further market penetration in that region. Continued growth of the overall business is also based upon the re-introduction of booms in 2006.
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 predominantly purchased in U.S. dollars; when the Canadian dollar strengthens, the equipment cost is reduced as is depreciation over future years. Since Linamar's business is capital intensive, U.S. dollar purchases have a notable positive impact on earnings over future periods. The company continues to employ a hedging strategy where appropriate for net U.S. dollar positive cash flows. The stronger Canadian dollar is also reducing price competitiveness for Canadian dollar denominated sales.
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 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.
Other principal challenges and risks that the company faces moving forward are the slow pace of outsourcing by the OEMs in the powertrain segment, the market share shift to the Asian automakers, the shortage of qualified technical people in the labour pool, low cost country outsourcing (such as China) and technologies that eliminate the need for machining.
In addition, the automotive industry continues to decrease the supply base mainly due to the actions of the OEMs. Through this reduction, there have been considerable consolidations or acquisitions of smaller suppliers. These consolidations provide Linamar with additional opportunities to expand the automotive sales base.
Strategies employed to address market challenges include focusing, through Linamar's sales and marketing organization and technical resources, on strategic sales products and processes to meet customer and product sales levels. Linamar is making significant capital expenditures (as illustrated in 2005) on various new programs that target key products and expand into assemblies and modules. Expansion into China and Korea is also an important aspect of Linamar's growth strategy.
Risk and Uncertainties (forward looking statements)
Certain information provided by Linamar in these unaudited interim financial statements, MD&A and other documents published throughout the year that are not recitation of historical facts may constitute forward looking statements. The words "estimate", "believe", "expect" and similar expressions are intended to identify forward-looking statements. Persons reading this report are cautioned that such statements are only predictions and the actual events or results may differ materially. In evaluating such forward-looking statements, readers should specifically consider the various factors that could cause actual events or results to differ materially from those indicated by such forward-looking statements.
Such forward-looking information may involve important risks and uncertainties that could materially alter results in the future from those expressed or implied in any forward-looking statements made by, or on behalf of, Linamar. Some risks and uncertainties may cause results to differ from current expectations. The factors which are expected to have the greatest impact on Linamar include but are not limited to (in the various economies in which Linamar operates): the extent of OEM outsourcing, industry cyclicality, trade and labour disruptions, pricing concessions and cost absorptions, delays in program launches, the company's dependence on certain engine and transmission programs and major OEM customers, currency exposure, and technological developments by Linamar's competitors.
A large proportion of the company's sales are denominated in U.S. dollars and the company also purchases a significant amount of raw materials, supplies and equipment in U.S. dollars. The strengthening of the Canadian dollar has the potential to have a negative impact on financial results. The company has employed a hedging strategy as appropriate to attempt to mitigate the impact but cannot be completely assured that the entire exchange effect has been offset.
Other factors and risks and uncertainties that could cause results to differ from current expectations are discussed in the MD&A and 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
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