ElringKlinger AG: company overview and operations

Elring Klinger AG

ElringKlinger is a German-based manufacturer and marketer of automotive parts. The company focuses on the spare parts sector, and supplies parts to all major automotive manufacturers. All told, EK sells its products in approximately 140 countries around the world.

ElringKlinger has its roots in an 1879 Stuttgart firm that produced technical parts and gaskets, which still today form the core of the company's business. This part of the company was founded by Paul Lechler; the other part began as the drafting office of Richard Klinger in Vienna in 1885. By 1900, Lechler was selling gaskets to the automotive industry, and by 1914 a gasket manufacturing operation had begun in Stuttgart. Klinger eventually began to pursue the same business. Thus, by 1924 Lechler was producing cylinder-head gaskets and in 1930 Klinger followed suit.

The two companies continued on separate trajectories after the war, with Lechler gaskets now produced under the firm name Elring Dichtungswerke KG in the town of Dettingen/Erms. In 1971, Elring expanded into the Spanish market and in the following year added two new production sites in Germany. The next decade saw Elring establish a South African subsidiary. By then, Klinger was also a large international automotive supplier. The two companies continued their separate expansions in the coming years - Klinger to Great Britain and Elring to South Korea.

In 1994, the modern history of ElringKlinger begins when Elring GmbH merges with the Automotive Division of Richard Klinger GmbH. The resulting company, ElringKlinger GmbH, was set to grow. Expansion came rapidly throughout the 1990s, with the firm establishing a number of subsidiaries, in Great Britain, Brazil, Italy, Mexico, the U.S. And Germany.

The firm begins life in the 21st century by merging with ZWL Grundbesitz- und Beteiligungs-AG to form ElringKlinger AG in 2000. The first continues expansion, into Canada as well as into new product lines such as engine cover modules. In 2002 they increased their holdings in China, founded a new logistics unit and began trading in Frankfurt and Stuttgart. By 2005, with more international subsidiaries in Brazil and Japan, the company's stock splits. Recent maneuvers have increased the company's presence in China and India. Most recently, ElringKlinger took over a Swiss firm, SEVEX AG, that manufactures heat shields.

Products

ElringKlinger AG manufactures products along three main lines: automotive original equipment, automotive spare parts & repairs, and industrial equipment. The automotive original equipment segment is the most diverse. Products within this range include sealing systems, cylinder-head gaskets, specialty gaskets, modules, shielding systems, and engine-test devices. Because of EK's close work with powertrains, they are also involved in fuel cell research, helping to incorporate that emerging technology into modern engines.

The company began making cylinder-head gaskets in 1924, but the product remains relevant today. These gaskets play an important role in engines with modern technologies such as direct fuel injection and high-performance diesel. With this product, the emphasis today is on reducing weights in order to reduce the overall engine weight and thereby reducing fuel consumption. The signature brand of cylinder head gasket at ElringKlinger is Metaloflex, which contains modern spring steel, elastomer coating and a modular design. ElringKlinger is at the cutting edge of improvements in metal-elastomer cylinder gaskets. Specialty gaskets can be either elastomer or soft metal.

ElringKlinger is also a major manufacturer of engine covers. These are made of any number of materials depending on the automobile manufacturer's specification, including plastic, aluminum, steel or magnesium. Another of ElringKlinger's main product lines is spare parts. These include products aimed at markets outside of the automotive industry, such as boat engines, lawnmowers and light motorcycles. On the automotive side, EK parts are used in both consumer and commercial vehicles. In addition to gaskets and gasket-head bolts, this line also includes sealing compounds, oil seals, and rings. Commercial vehicles for which EK produces parts include Scania, Volvo, MAN and Mercedes-Benz. The company markets the parts through automotive supply wholesalers, who then provide them to shops and retailers.

The third major business line is Industrial Equipment. For this market, ElringKlinger mainly produces gaskets, but does so for a variety of engines. In addition to car and truck engines, EK produces for ships, trains and heavy machinery. These gaskets are developed for use in engines for a wide range of manufacturers, including Liebherr, Deutz, MAN, Volvo Penta, MTU and MWM.

The company also provides engine testing services at its facilities in Idstein and Dettingen/Erms. These tests can be conducted on prototype engines or components. Types of tests include durability tests, shock tests, performance measurement and computer-aided engine management optimization. Lastly, the company's ElringKlinger Kunststofftechnik subsidiary specializes in engineered plastics. Again, the main focus of these products is the automotive industry including seals, hoses, diaphragms, and high-performance nozzles.

Finances

The ElringKlinger Group has consistently grown its earnings over the past four years. Top line growth was 15.02% last year and 32.2% over the past four years. Sales in millions of Euros as broken down by operating group are as follows:

Sales in millions of Euros, broken down geographically are:

Sales and profit growth over the past four years are as follows:

Profits in each group increased last year. Original equipment recorded a profit gain of 37.0%; Aftermarket recorded a profit gain of 27.8%; Engineered Plastics recorded a profit gain of 13.7%. Each of these product lines continues to provide significant top and bottom line growth to the organization. Services, the smallest product category, posted strong top and bottom line gains but was a minor factor in overall results. The Industrial Park division recorded negligible top and bottom line gains and does not appear to be an important component of the company's overall strategy.

An examination of these figures reveals that ElringKlinger has experienced stronger growth in profits over the past four years than it has experienced in revenues. Indeed, the firm's net margin in 2007 was 18.9%, compared with 15.6% in 2005. This improved performance is also reflected in the company's returns. The return on total assets has improved from 11.3% in 2005 to 16.5% last year; the return on equity has improved from 26.4% to 31.3% over the same time period. The main reason for this improved efficiency has been ElringKlinger's ability to generate increased sales while holding the line on expenses. Revenues in 2005 were €459.5 million, with general and administrative expenses that year totaling €22.2 million. Last year, with revenues of €607.8 million, general and admin costs were €22.1 million. In the same period, the gross margin increased slightly from 33.6% to 34.1%. ElringKlinger's ability to generate increased revenues from the same cost structure appears to be a fundamental factor in the firm's improved income statement performance in recent years. The following chart shows the steady improvement in ErlingKlinger's net margin, compared to the gross margin, over the past four years.

Over the past year, liquidity at ErlingKlinger has declined. The current ratio has dipped from 2.08 to 1.77; the quick ratio from 0.97 to 0.77 and the cash ratio from 0.06 to 0.05. The firm's overall debt level has changed little in that time. The debt ratio is at 0.51 for both years. The more volatile debt-to-equity ratio only dipped from 1.06 to 1.03. This indicates that the company's decline in liquidity is unrelated to their overall degree of leverage. In part, the firm saw a reduction in its inventory turnover, from 5.87 times to 5.35 times. The receivables turnover dipped only slightly, from 6.52 times to 6.49 times. The major difference contributing to the decline in liquidity is that more of the company's debt load is current compared with last year. In other words, a significant portion of long-term debt has come current. However, the company is perfectly liquid, and can easily meet this obligation.

In terms of profitability, ErlingKlinger's main AG subsidiary is the most profitable. That core operation accounted for 94.5% of the group's profits in 2007. This compares with 93.3% in 2006; 90.9% in 2005; and 89.1% in 2004. In 2007, the ErlingKlinger AG subsidiary accounted for 58.6% of the group's revenues. All told, the AG subsidiary's net margin was 21.2%, compared with 13.2% for the group. Exclusive of AG, the group's net margin was only 1.7%. Thus we can extrapolate that the core AG business is the main profit driver for the ErlingKlinger Group. The remaining subsidiaries contribute little in the way of profit to the company.