Martinrea shares fall after supplier misreports income

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TORONTO (Bloomberg) -- Shares in Martinrea International Inc., Canada’s third-largest auto parts maker by market value, slumped after it warned one of its factories had misreported net income over eight years and said earnings would be lower than forecast.

“The net income of the company may have been overstated by C$10 to C$18 million ($9 million to $17 million) in total, spread over the years 2005-2012,” the Vaughan, Ontario-based company said in a statement after markets closed Wednesday.

Martinrea has notified its external auditor and does not anticipate the discrepancy to affect 2013 earnings, the company said. Fourth-quarter earnings will also likely be negatively impacted by operational issues and fall short of previously provided guidance the company said. Litigation may also drag on, it said.

Martinrea shares fell 21 percent to C$7.47 at 12:55 p.m. in Toronto on Thursday, the biggest intraday decline since May 5, 2011.

Martinrea is facing a lawsuit from former vice-chairman Nat Rea who has accused directors and executives at the company of breaching their fiduciary responsibilities by allegedly making payments in connection to transactions with specific customers and suppliers, according to a Sept. 26 statement from Rea Holdings Inc.

“The company’s position remains that the Rea claims are without merit, improperly motivated and should be dismissed,” Martinrea said in today’s statement. The next stage of litigation isn’t expected for another several months, the company said.

Rating cut

“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,” CEO Rob Wildeboer said in the statement. “We will do the same here.”

Bank of Montreal cut its rating on the stock to the equivalent of sell from a hold and dropped its target price to $9.00 from $12.50.

“Investors may begin to question the company’s overall system of internal financial controls and the accuracy of its financial reporting,” Peter Sklar, a Toronto-based Bank of Montreal analyst, said in a note to clients. “There may be a pattern of operational issues out of the norm,” he said.

Martinrea’s Wildeboer did not immediately return a phone message asking for additional comment.

Martinrea ranked No. 68 on the Automotive News list of the largest global auto suppliers with 2012 automotive revenues of $2.9 billion.

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