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Profit warning puts a 21-per-cent dent in Martinrea shares

File photo of a Martinrea operation.

philip cheung The Globe and Mail

New problems that have emerged at auto parts maker Martinrea International Inc. have sent the company's shares plunging.

Shares in the third-largest Canadian parts maker by revenue tumbled 21 per cent on the Toronto Stock Exchange Thursday after the company issued a fourth-quarter profit warning following the close of markets on Wednesday.

Costs of litigation from a shareholder lawsuit and operating issues at a plant in Kentucky will cause fourth-quarter profit to be less than the 23 to 28 cents a share originally expected, Martinrea said.

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The company also said it appears that one of its Canadian plants misreported financial results between 2005 and 2012, which led Martinrea to overstate its final profit by $10-million to $18-million during that period.

The announcements come amid a lawsuit by former vice-chairman Nat Rea, which accuses some company officers and directors of breaching their fiduciary duties and engaging in corrupt practices. The company has declared the allegations to be without merit, launched a countersuit and struck a special committee of its board of directors to examine the issues raised in the suit.

The financial reporting of the Ontario plant is not related to the litigation against some of the officers and directors of the company, Martinrea said in a statement released after the close of stock markets on Wednesday.

"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."

On a positive note, Martinrea said restructuring costs from a facility in Germany will be lower than expected.

The operating problems at its plant in Hopkinsville, Ky., have been caused in part by engineering changes requested by the customer and the overall increase in vehicle production as auto makers respond to the growth in the U.S. market.

Two of the plant's large stamping presses have experienced serious failures, the company said.

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The disclosures led BMO Capital Markets Inc. analyst Peter Sklar to downgrade the company's shares to underperform from market perform and cut his price target to $9 from $12.50.

Canaccord Genuity analyst David Tyerman said the slump in the company's share price represents a buying opportunity.

"We think Martinrea (MRE) is an interesting investment opportunity for risk-oriented investors," Mr. Tyerman said in a research note Thursday. "We believe current legal, accounting and financial performance uncertainties could be resolved or dissipated in a reasonably short time frame, providing material share price appreciation potential."

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About the Author
Auto and Steel Industry Reporter

Greg Keenan has covered the automotive and steel industries for The Globe and Mail since 1995. He also writes about broader manufacturing trends. He is a graduate of the University of Toronto and of the University of Western Ontario School of Journalism. More

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