Martinrea International Inc.: Corporate Update

Martinrea International Inc.: Corporate Update
  
 

TORONTO, ONTARIO--(Marketwired - Dec 18, 2013) - Martinrea International Inc. (TSX:MRE) a leader in the production of quality metal parts, assemblies and modules and fluid management systems focused primarily on the automotive sector, is providing an update on several corporate related matters.

Update on Litigation

The Martinrea defendants have completed their pleadings in the Rea litigation. The other defendants in the litigation are in the process of scheduling pleadings and other motions with the plaintiff. The pleadings are publicly available. The Company's position remains that the Rea claims are without merit, improperly motivated and should be dismissed. It intends to pursue its counterclaim seeking damages for abuse of process. As previously disclosed, supervision of the litigation has been delegated to a Special Committee of the Board. The next steps in the litigation process are not expected to begin for several months. It is anticipated that when the litigation action proceeds, ongoing time required by management with respect to the litigation will not be substantial as the Special Committee will continue to oversee it and liaise with counsel and experts as necessary.

Mandate of Special Committee

The Special Committee is comprised of Scott Balfour and Fred Olson, both independent directors with significant business and financial experience, as summarized in the Company's proxy materials. The Special Committee is authorized to supervise the investigation of the Rea allegations and review any other related matters that it decides are advisable to review or as may be further requested by the Board from time to time; to consider the appropriateness of relevant accounting policies followed by the Company and the adequacy of its internal controls; to instruct legal counsel in respect of the litigation; to consider and make recommendations to the Board as to any steps the Board should take as a result of its activities; and to consider any other matters it deems relevant.

Stikeman Elliott LLP is advising the Special Committee. Earl Cherniak of Lerners LLP has also been retained by the Special Committee as a special independent legal advisor. In addition, the Special Committee has retained PricewaterhouseCoopers LLP as its independent financial experts to provide such financial and accounting advice and forensic services as the Special Committee may deem appropriate. The Special Committee has the full cooperation of management and complete access to corporate information.

Corporate Governance and Nomination Committee

The Company is committed to effective corporate governance that results in good corporate performance. Its approach to corporate governance is described in its proxy materials, which are available on the Company's website and at www.sedar.com.

At the 2013 annual shareholders meeting, six directors were elected to the Board, each with high approval rates. As a result of a director recruitment process conducted in the first half of 2013 Scott Balfour was invited to serve as a director. Mr. Balfour brings significant financial and operational experience to the Board. The proxy materials also indicated that the Company would add another independent director in the coming year.

In the most recent quarterly call, the Company indicated that it plans to add two additional independent directors, with automotive/industrial/business and financial/governance experience. It also indicated that a new Corporate Governance and Nomination Committee of the Board has been created comprised of Scott Balfour and Fred Olson. The charter for the Committee includes board nominee identification and the establishment and review of governance policies. The Committee is actively considering director candidates, although it may be prudent to wait to choose from a full range of candidates once the Special Committee's initial work is complete.

2013 Financial Reporting

The Company has commenced preparations for the completion of its 2013 consolidated financial statements. Management has identified an issue with the historical reporting of one of the Company's Canadian plants and immediately notified the Board and its external auditor KPMG. The review is not complete; however it appears at this point that the plant misreported its financial statements over a number of years dating back to 2005. The discrepancies identified in the plant's financial statements appear to be rooted in the tracking of production and tooling inventories.

The issue with the historical reporting of the plant in question is not related to the Rea litigation. Rather, the discrepancies were revealed as part of an ongoing review by Martinrea financial management. However, the timing is such that the Board has asked the Special Committee to add the review of this matter to its mandate. Martinrea management is working with KPMG (its external auditor) and PWC to complete the work necessary to fully address the issue. Based on work to date, management does not anticipate any effect on year-to-date reported net earnings for 2013, and it is working to ascertain the adjustments to the consolidated financial statements, if any, which may be required for years previous. It is presently estimated by management that the net income of the Company may have been overstated by $10 to $18 million in total, spread over the years 2005-2012, but the exact figure will be determined after the completion of the analysis by management, KPMG and PWC. It has not been determined whether adjustments to the consolidated financial statements will be material from an accounting perspective. While the work continues in earnest to fully determine and quantify the impacts, the Board has determined to make public the ongoing review and will disclose the particulars of the review and the steps taken, if any, as a result, once completed.

Operational and Financial Update

The Company provided an update on the Company's operations and financial position with the release of its third quarter financial statements, and gave earnings guidance for the fourth quarter of 2013. Since the release of those financial statements, several events have taken place which will impact earnings for the fourth quarter.

Some of the litigation costs are not covered by insurance. For the most part these costs were not factored into the original earnings guidance for the quarter.

While the vast majority of the Company's plants are performing according to the fourth quarter forecast, the Company has been experiencing operational issues at its Hopkinsville plant, as it deals with new program launches, copes with customer-requested engineering changes which are impacting productivity and continues to deal with the overall ramp-up in production volumes being experienced in the automotive industry. This has resulted in incremental premium costs in the form of expedited freight, overtime, increased manpower, higher scrap levels, sorting and rework costs, launch related inefficiencies and other costs. In addition, Hopkinsville has again experienced serious equipment failures on two of its large tonnage presses. The presses are operational again but are not yet performing at optimal levels. This has resulted in the outsourcing of dies and further delays in the planned insourcing of dies. The Company is looking at a year-end write-down of assets for that plant. Consistent with its decentralized structure, the Company assesses the recoverability of asset values on a plant-by-plant basis. In accordance with the Company's accounting policies, assets can only be written down and not up above the original cost base. The Company believes the carrying value of its overall assets as shown on its financial statements is well below replacement cost.

As previously indicated, the Company anticipated some restructuring costs at its Martinrea Honsel operations in Germany in the fourth quarter of 2013, as the Company continued to adjust the size of the workforce and experience severance costs. It appears that such costs will be lower than previously anticipated for the fourth quarter and for the year in general.

The Company anticipates that net earnings for the fourth quarter will be negatively impacted by these unusual items and expenses and will likely fall short of previously provided earnings guidance for the quarter. The Company remains focused on its operations and their financial performance. Most plants are either meeting or exceeding expectations. Next year is anticipated to be another record year from a financial perspective.

The Company also announced that it has recently closed a $50 million equipment based financing with GE Capital to finance equipment purchases. Proceeds will be applied to equipment financing and the reduction of the Company's operating lines.

Rob Wildeboer, the Company's Executive Chairman, stated: "After consecutive record quarters from a financial and performance perspective, we are dealing with some legal and operational issues. We have faced many challenges over the years as we grew this company from scratch, and have always met every challenge head on with conviction and a desire to do the right thing for all our stakeholders. We will do the same here. We have a great team, doing great things, and we remain singularly focused on being the best in the world at what we do. Our prospects remain excellent. I am pleased to announce that since September 30, 2013, we have been awarded new or replacement product mandates from multiple customers, including Ford, GM and Chrysler. Notwithstanding the above noted challenges, we are still looking at a record year in 2013, with even better years ahead."

Forward-Looking Information

Special Note Regarding Forward-Looking Statements

This Press Release contains forward-looking statements within the meaning of applicable Canadian securities laws, including statements as to: the success of the Rea litigation and impact on operations; the addition of new independent directors; the size, materiality, impact on earnings or otherwise and the cause of discrepancies in the financial statements at one of the Company's plants, and the disclosure of the details of the review; the impact on net earnings as a result of unusual items and expenses for the fourth quarter; the expectations as to the Company's performance for 2013 and future years; the financial impact of the Rea litigation on earnings; operational issues and the write down of assets at its Hopkinsville plant; restructuring costs at the Martinrea Honsel operations in Germany; as well as other forward looking statements. The words "continue", "expect", "anticipate", "estimate", "may", "will", "should", "views", "intend", "believe", "plan" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on estimates and assumptions made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors that the Company believes are appropriate in the circumstances. Many factors could cause the Company's actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the risk factors discussed in detail in the Company's Annual Information Form dated March 20, 2013 and other public filings which can be found at www.sedar.com.

These factors should be considered carefully, and readers should not place undue reliance on the Company's forward-looking statements. The Company has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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

Martinrea International Inc.Rob WildeboerExecutive Chairman(416) 749-0314(289) 982-3001