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Wescast Reports Third Quarter Sales and Earnings(Market Wire Via Thomson Dialog NewsEdge) BRANTFORD, ONTARIO, October 30 / MARKET WIRE/ -- Wescast Industries Inc. (TSX: WCS.A) today reported 2007 third quarter sales of $90.3 million and a net loss of $2.4 million. "We remain pleased with the continued sales growth in our European operations, but we are disappointed with the slower than expected improvement in the operating metrics and profitability of that business unit," said Ed Frackowiak, Wescast Chairman and CEO. "Global expansion, through our China construction project and growth in Europe, remain key pillars for our future success. We continue to focus on actions in our North American operations to improve efficiencies, reduce costs, and develop new products to counter the impact of the decreasing market share of our customer base. The impact of global competition, rising raw material costs, and the strong Canadian dollar continue to create a challenging environment." Highlights - The Company reported consolidated sales of $90.3 million, an increase of 6.5% compared to the $84.8 million reported in the third quarter of 2006, reflecting a significant increase in the level of sales generated by the Company's European operations and higher prototype and tooling sales. - The Company reported a loss from continuing operations before income taxes of $0.9 million for the quarter, compared to a $1.6 million loss reported in the third quarter of 2006. The net loss reported for the quarter was $2.4 million compared with a net loss of $1.4 million reported in the same quarter last year. - Income tax expense of $1.5 million was reported even though the Company experienced a loss during the quarter. The level of income tax expense reported for the quarter was unusual, given the reported loss. This was due to the impact of non-tax deductible foreign exchange translation losses of $2.2 million and the losses realized by the European and Chinese operations, in the aggregate of $2.2 million, for which income tax benefits were not recorded. - The North American automotive industry experienced a 3.5% increase in light vehicle production levels in the third quarter of 2007 compared to the third quarter of 2006. The domestic Big 3 automakers, the Company's primary North American customer base, experienced only a 1.4% increase in their light vehicle production levels compared to the same period in 2006. - The Company's expansion into China steadily progressed during the third quarter. Trial manufacturing runs are expected to occur during the fourth quarter and foundry production activities will commence during the first quarter of 2008. During the quarter, pre-launch expenditures represented a net loss of $1.1 million and $7.4 million of capital expenditures were incurred. Operations Consolidated Sales Consolidated sales for the quarter were $90.3 million, a 6.5% increase compared to the $84.8 million reported during the third quarter of 2006. The consolidated sales are net of inter-segment sales of $1.8 million between the Company's European and North American business units. The sales analysis presented for the business units is based on gross sales. Consolidated prototype and tooling sales in the third quarter were $2.8 million, up from the $1.8 million reported during the same quarter last year, reflecting changes in the number and timing of new customer programs. North American Sales North American sales, excluding prototype and tooling sales, declined by 1.6% to $66.6 million compared to $67.7 million reported in the third quarter of last year. The North American operations experienced a quarter-over-quarter decline of approximately 3.0% in unit casting sales volume. Machining volumes were up 2.1% compared to the third quarter of 2006. The casting unit volume and sales decline resulted from: - The impact of market-driven price reductions compared to the same quarter last year; - A temporary reduction in volumes to Chrysler, due to their changeover from the current RS minivan platform to the new RT platform; - A reduction in light truck volume requirements for certain programs of the domestic Big 3, due in part to high fuel prices and competition from the new domestic automakers; and, - A reduction in the volume and demand requirements on programs with Nissan. The factors above were partially offset by increased volumes on certain programs with General Motors and Ford. A higher percentage of parts sold that were both cast and machined compared to 2006 also had a positive impact on North American sales. European Sales Sales generated by the Company's operation in Europe, excluding prototype and tooling sales, were up 25.7% to $22.6 million compared to $18.0 million during the third quarter of 2006. The operation achieved a quarter-over-quarter increase in casting unit sales volume of 6.2% . Total units machined were 33.3% higher than the third quarter of 2006. The increase in unit volume and sales compared to the third quarter of 2006 is the result of higher volumes for programs that were launched in 2006 and new programs that launched in 2007. Also contributing to the increased sales level was the impact of a stronger Hungarian forint against the Canadian dollar compared to the third quarter of 2006 and an increase in sales from machined only programs. The cost to acquire the raw castings for certain of these machined only programs is quite high, with the casting cost representing a direct pass through to the end customer. Market-driven price reductions partially offset the above positive factors. Consolidated Earnings The Company reported a loss from continuing operations of $2.4 million for the third quarter, compared with a loss of $1.4 million reported in the same quarter last year. North American Earnings The Company's North American operations reported a net loss of $0.1 million, consistent with the net loss of $0.3 million reported in the third quarter of 2006. The gross profit generated for the quarter was $8.8 million, compared to $8.0 million generated during the same quarter last year. Included in the net loss for the quarter was a significant non-tax deductible foreign exchange translation loss of $2.2 million which had a negative impact on the level of income tax expense reported in the North American operations. The increase in gross profit from 2006 to 2007 was due mainly to: - A higher volume of parts sold that were both cast and machined which positively impacted the mix of parts compared with the third quarter of 2006; - Various restructuring efforts aimed at reducing the fixed costs associated with support functions; and, - Significantly lower depreciation expense related to the machining operations. The impact of these factors was partially offset by the following negative factors: - Lower casting volumes; - Market-driven sales price reductions; - Lower operating performance of the manufacturing facilities due to higher manufacturing scrap rates and equipment downtime; - Increased repairs and maintenance costs; and, - Higher raw material prices compared with 2006, specifically moly. European Earnings The Company's European operations generated a net loss for the third quarter of $1.1 million compared to a net loss of $0.7 million reported in the same quarter last year. The profitability of the European operation was positively impacted by the following: - Increased casting and machining volumes which provided better absorption of fixed costs; and, - Slightly improved operating metrics, including equipment uptime and manufacturing scrap rates, compared to the third quarter of 2006. These positive factors were more than offset by the following: - Increased depreciation expense compared to the third quarter of 2006 due to capital investments made in 2006 and 2007; - A provision for bad debts to reflect the uncertainty in collection of a customer account; and, - Higher raw material, electricity and payroll costs compared to the same quarter last year. A more detailed discussion of the consolidated results for the quarter ended September 30, 2007 is contained in the attached Management's Discussion and Analysis which follows the interim consolidated financial statements and the notes thereto. About Wescast Wescast Industries Inc. is the world's leading supplier of cast iron exhaust manifolds for passenger cars and light trucks. The Company designs, casts, machines and assembles iron exhaust system components for automotive original equipment manufacturers ("OEMs") and Tier 1 customers for the car and light truck markets in North America, Europe and Asia. The Company employs approximately 1,900 people in 7 production facilities and 3 sales and design centres in Canada, the United States and Germany. The Company also has sales and technical design representation in the United Kingdom, France, Japan and China. The Company is recognized worldwide for its quality products, innovative design solutions and highly committed workforce. Learn more at www.wescast.com. Forward-Looking Statements The contents of this news release contain statements which, to the extent that they are not recitations of historical fact, may constitute forward-looking statements based on certain assumptions and reflect Wescast's current expectations. Such forward-looking statements may include financial and other projections as well as statements regarding Wescast's future plans, objectives or performance for the current period and subsequent periods. The words "may", "would", "could", "will", "likely", "expect", "anticipate", "estimate", "intend", "plan", "forecast", "project" and "believe" or other similar words and phrases are intended to identify forward-looking statements. Persons reading this news release are cautioned that such statements are only predictions, and that Wescast's actual future results or performance may be materially different. This information is based upon certain material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking statements, including our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties principally relate to the risks associated with the automotive industry and include, but are not limited to: our operating and/or financial performance, including the effect of new accounting standards on our reported financial results, fluctuations in interest rates, changes in consumer and business confidence levels, consumers' personal debt levels, vehicle prices, the extent and nature of purchasing or leasing incentive campaigns offered by automotive manufacturers, environmental emission regulations, fuel prices and availability, the continuation and extent of outsourcing by automotive manufacturers, changes in raw material and other input costs, our ability to continue to meet customer specifications relating to product performance, cost, quality, delivery and service, industry cyclicality or seasonality, trade and/or labour issues or disruptions, customer pricing pressures, pricing concessions and cost absorptions, actual levels of program production volumes by our customers compared to original expectations, including program cancellations or delays, price reduction pressures, dependence on certain engine programs and the market success and consumer acceptance of the vehicles into which such powertrain products are installed, our relationship with and dependence on certain customers, currency exposure, failures in implementing Wescast's strategy, technological developments by Wescast's competitors, government and regulatory policies and changes in the competitive environment in which Wescast operates. Wescast does not undertake any obligation to update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this news release or to reflect the occurrence of unanticipated events, except as required by law. A conference call has been arranged for: October 31, 2007 3:00 p.m. EST To participate, please dial: North America 1-800-525-6384; International 1-647-427-3420. Conference ID# 19919819 (required). Investors can also listen to the live conference call by webcast by visiting www.wescast.com and accessing the link on our homepage. Call back is available from October 31, 2007 to November 7, 2007, to access please dial 1-800-766-3394 (International: 1-402-220-7734) and enter pass code 19919819. Wescast Industries Inc. Consolidated Statements of Earnings and Retained Earnings (in thousands of Canadian dollars, except per share amounts) (Unaudited) Three months ended Nine months ended ----------------------------------------------- September October September October 30, 2007 1, 2006 30, 2007 1, 2006 ----------------------------------------------- Sales $ 90,345 $ 84,825 $ 295,659 $ 286,312 Cost of sales 82,407 76,818 259,140 248,111 Gross profit 7,938 8,007 36,519 38,201 Selling, general and administration 7,392 7,527 22,225 21,185 Stock-based compensation (4) - 1 1 Research, development and design 1,946 1,522 5,344 4,585 ----------------------------------------------- (1,396) (1,042) 8,949 12,430 ----------------------------------------------- Other (income) expense Interest expense 187 345 582 1,442 Investment income (166) (106) (365) (241) Other (541) 353 389 (1,709) ----------------------------------------------- (520) 592 606 (508) ----------------------------------------------- Earnings (loss) from continuing operations before income taxes (876) (1,634) 8,343 12,938 Income taxes 1,535 (256) 6,481 4,996 ----------------------------------------------- Earnings (loss) from continuing operations (2,411) (1,378) 1,862 7,942 Net earnings (loss) from discontinued operations 30 (21) 56 (369) ----------------------------------------------- Net earnings (loss) ($2,381) ($1,399) $ 1,918 $ 7,573 ----------------------------------------------- ----------------------------------------------- Earnings (loss) from continuing operations per share (Note 6) - Basic and diluted ($0.18) ($0.11) $ 0.14 $ 0.61 ----------------------------------------------- ----------------------------------------------- Net earnings (loss) per share (Note 6) - Basic and diluted ($0.18) ($0.11) $ 0.15 $ 0.58 ----------------------------------------------- ----------------------------------------------- Retained earnings, beginning of period $ 260,791 $ 264,604 $ 258,068 $ 257,206 Net earnings (loss) (2,381) (1,399) 1,918 7,573 Dividends paid (788) (787) (2,364) (2,361) ----------------------------------------------- Retained earnings, end of period $ 257,622 $ 262,418 $ 257,622 $ 262,418 ----------------------------------------------- ----------------------------------------------- Wescast Industries Inc. Consolidated Statements of Comprehensive Income (in thousands of Canadian dollars) (Unaudited) Three months ended Nine months ended ----------------------------------------------- September October September October 30, 2007 1, 2006 30, 2007 1, 2006 ----------------------------------------------- Net earnings (loss) ($2,381) ($1,399) $ 1,918 $ 7,573 Other comprehensive income, net of income tax: Change in unrealized gains (losses) on translating financial statements of self sustaining foreign operations (1,945) 3,923 (7,167) (5,178) ----------------------------------------------- Comprehensive income (loss) ($4,326) $ 2,524 ($5,249) $ 2,395 ----------------------------------------------- ----------------------------------------------- Wescast Industries Inc. Consolidated Balance Sheets (in thousands of Canadian dollars) (Unaudited) As at September 30, December 31, 2007 2006 ------------------------------- Assets Current Cash and cash equivalents $ 12,248 $ 16,071 Accounts receivable 69,479 54,880 Inventories 33,134 33,200 Prepaid expenses 2,548 2,067 Future income taxes 1,430 1,430 Current assets - discontinued operations 25 63 ---------------------------- 118,864 107,711 Property, plant and equipment 285,972 287,297 Future income taxes 35,298 43,530 Assets held for sale 2,749 4,969 Long-term assets - discontinued operations - 408 Other assets 134 1,066 ---------------------------- $ 443,017 $ 444,981 ---------------------------- ---------------------------- Liabilities and Shareholders' Equity Current Accounts payable and accrued liabilities $ 37,731 $ 37,288 Income taxes payable 4,375 167 Current portion of long-term debt 1,553 1,672 Restructuring charge - 52 Future income taxes 123 123 Current liabilities - discontinued operations 62 147 ---------------------------- 43,844 39,449 Long-term debt 4,083 4,822 Deferred government assistance 2,607 3,081 Future income taxes 10,162 9,925 Employee benefits 21,447 19,307 ---------------------------- 82,143 76,584 ---------------------------- Contingency (Note 4) Shareholders' Equity Capital stock (Note 3) 110,897 110,816 Retained earnings 257,622 258,068 Share purchase loans (140) (149) Accumulated other comprehensive income (loss) (Note 5) (7,505) (338) ---------------------------- 360,874 368,397 ---------------------------- $ 443,017 $ 444,981 ---------------------------- ---------------------------- Wescast Industries Inc. Consolidated Statements of Cash Flows (in thousands of Canadian dollars) (Unaudited) Three months ended Nine months ended ----------------------------------------------- September October September October 30, 2007 1, 2006 30, 2007 1, 2006 ----------------------------------------------- Cash derived from (applied to) Operating Earnings (loss) from continuing operations ($2,411) ($1,378) $ 1,862 $ 7,942 Add (deduct) items not affecting cash: Depreciation and amortization 8,023 9,218 25,074 28,544 Unrealized exchange loss (gain) on future taxes 2,182 (36) 5,582 1,471 Future income taxes 908 832 2,838 3,188 Loss (gain) on disposal of equipment 17 31 65 (68) Deferred government assistance (144) 42 (474) 477 Stock-based compensation, net of payments (5) - - (18) Employee benefits, net of payments 797 527 2,140 2,011 ----------------------------------------------- 9,367 9,236 37,087 43,547 Change in non-cash operating working capital (Note 7) (1,531) 11,554 (9,967) 5,286 ----------------------------------------------- 7,836 20,790 27,120 48,833 Discontinued operations (4) 28 (29) (239) ----------------------------------------------- 7,832 20,818 27,091 48,594 ----------------------------------------------- Investing Purchase of property, plant and equipment and other assets (10,059) (8,822) (30,190) (21,262) Proceeds on disposal of equipment 4 32 966 1,495 Discontinued operations 447 - 494 175 ----------------------------------------------- (9,608) (8,790) (28,730) (19,592) ----------------------------------------------- Financing Issue of long-term debt 461 8,895 2,279 20,386 Repayment of long-term debt (1,020) (18,576) (2,176) (44,797) Payments under capital lease obligations (2) (12) (13) (86) Issuance of common shares 26 31 81 114 Employee share purchase loan repayments 3 - 9 47 Dividends paid (788) (787) (2,364) (2,361) ----------------------------------------------- (1,320) (10,449) (2,184) (26,697) ----------------------------------------------- Net increase (decrease) in cash and cash equivalents (3,096) 1,579 (3,823) 2,305 Cash and cash equivalents Beginning of period 15,344 2,670 16,071 1,944 ----------------------------------------------- End of period $ 12,248 $ 4,249 $ 12,248 $ 4,249 ----------------------------------------------- ----------------------------------------------- Wescast Industries Inc. Notes to the Consolidated Financial Statements (in thousands of Canadian dollars, except per share amounts) (Unaudited) Note 1. Basis of presentation The unaudited interim consolidated financial statements ("interim financial statements") have been prepared following the same accounting policies as set out in the annual consolidated financial statements for the year ended December 31, 2006 included in the Company's 2006 Annual Report to Shareholders. These are interim financial statements and as such the disclosures do not conform in all respects to the requirements of generally accepted accounting principles applicable to annual consolidated financial statements. These interim financial statements should be read in conjunction with the most recent annual consolidated financial statements for the year ended December 31, 2006. The interim financial statements and the notes thereto have not been reviewed by the Company's external auditors pursuant to a review engagement applying review standards set out in the CICA handbook. Note 2. Changes in accounting policies Effective January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3855, Financial Instruments -- Recognition and Measurement, Section 3865, Hedges, Section 1530, Comprehensive Income and Section 3861, Financial Instruments -- Disclosure and Presentation. The adoption of the new standards requires changes in accounting for financial instruments and hedges as well as the recognition of certain transition adjustments. The Company had no such transition adjustments. The comparative consolidated financial statements have not been restated, except for the presentation of translation gains or losses on self-sustaining foreign operations. a) Financial assets and financial liabilities Under the new standards, financial assets and financial liabilities are initially recognized at fair value and are subsequently accounted for based on their classification as described below. The classification depends on the purpose for which the financial instruments were acquired and their characteristics. Except in very limited circumstances, the classification is not changed subsequent to initial recognition. Transaction costs are recognized immediately in income or are capitalized, depending upon the nature of the transaction and the associated financial instrument. All financial instruments are classified into one of the following five categories: held for trading, held to maturity investments, loans and receivables, available for sale financial assets or other financial liabilities. All financial instruments, including derivatives, are included on the balance sheet and are measured at fair value with the exception of loans and receivables, held to maturity investments and other financial liabilities, which are measured at amortized cost. Held for trading financial instruments are measured at fair value and all gains and losses are included in net earnings in the period in which they arise. Available for sale financial instruments are measured at fair value with revaluation gains and losses included in other comprehensive income until the asset is removed from the balance sheet. As a result of the adoption of these standards, the Company has classified its cash and cash equivalents and derivatives as held for trading. Accounts receivable and other receivables are classified as loans and receivables. Accounts payable and accrued liabilities and long-term debt have been classified as other financial liabilities, all of which are measured at amortized cost. The fair value of a financial instrument on initial recognition is the transaction price, which is the fair value of the consideration given or received. Subsequent to initial recognition, fair value is determined using valuation techniques which refer to observable market data. b) Embedded derivatives Derivatives may be embedded in other financial instruments (the "host instruments"). Prior to the adoption of the new standards, such embedded derivatives were not accounted for separately from the host instrument. Under the new standard, embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not clearly and closely related to those of the host instrument. The terms of the embedded derivatives are measured at fair value with subsequent changes generally recognized in net earnings. The Company has elected to apply this accounting treatment for all embedded derivatives in host contracts entered into on or after January 1, 2003. The impact of the change in accounting policy related to embedded derivatives was not material. c) Comprehensive income Comprehensive income is composed of the Company's net earnings or net loss and other comprehensive income. Other comprehensive income includes unrealized gains and losses on available-for-sale financial assets, foreign currency translation gains and losses on the net investments in self-sustaining operations and changes in the fair market value of derivative instruments designated as cash flow hedges, all net of income taxes. The components of comprehensive income are disclosed in the consolidated statements of comprehensive income. d) Hedge accounting There was no impact on the Company as a result of adopting Section 3865, Hedges. Note 3. Capital stock Authorized Unlimited Preference shares, no par value Unlimited Class A subordinate, voting shares, no par value ("Class A shares") 9,000,000 Class B common shares, no par value ("Class B shares") September 30, December 31, 2007 2006 ----------------------------- Issued and outstanding 5,758,455 Class A shares (2006 - 5,751,648) $ 98,470 $ 98,389 7,376,607 Class B shares (2006 - 7,376,607) 12,427 12,427 ----------------------------- $ 110,897 $ 110,816 ----------------------------- ----------------------------- Note 4. Contingency During the quarter, the Company received a notice of reassessment from the Canada Revenue Agency ("CRA") related to its 2002 taxation year. The reassessment denies the income tax deduction of certain payments made to the Company's foreign affiliate. The potential amount owing, including interest, as a result of this reassessment is $4.1 million. This amount has been paid to the CRA to avoid future interest charges. The CRA is also auditing the years 2003 to 2005. The total payments deducted during this subsequent period were similar to those claimed in 2002. The Company believes it has a strong case to support the deductibility of these payments and has appealed the notice of reassessment. The Company will also appeal any further notices of reassessment. No provision has been made in the financial statements related to the reassessment. Note 5. Accumulated other comprehensive income (loss) Three months ended September 30, 2007 ------------------------------------- ------------------------------ Unrealized gain (loss) on translating financial statements of self-sustaining foreign operations ------------------------------ Balance, as at July 2, 2007 ($5,560) Changes during the quarter (1,945) ------------------------------ Balance, as at September 30, 2007 ($7,505) ------------------------------ ------------------------------ Nine months ended September 30, 2007 ------------------------------------ ------------------------------ Unrealized gain (loss) on translating financial statements of self-sustaining foreign operations ------------------------------ Balance, as at January 1, 2007 ($338) Changes during the period (7,167) ------------------------------ Balance, as at September 30, 2007 ($7,505) ------------------------------ ------------------------------ Note 6. Earnings per share Basic earnings (loss) per share from continuing operations and basic net earnings (loss) per share for the three months ended September 30, 2007 and October 1, 2006 are based on the weighted average common shares outstanding (2007 - 13,120,077 shares; 2006 - 13,110,479 shares). Diluted earnings (loss) per share from continuing operations and diluted net earnings (loss) per share for the three months ended September 30, 2007 and October 1, 2006 are based on the diluted weighted average common shares outstanding (2007 - 13,120,077 shares; 2006 - 13,110,479 shares). Certain shares were excluded from the diluted weighted average common shares outstanding as their effect was anti-dilutive (2007 - 16,583 shares; 2006 - 14,876 shares). Basic earnings per share from continuing operations and basic net earnings per share for the nine months ended September 30, 2007 and October 1, 2006 are based on the weighted average common shares outstanding (2007 - 13,120,186 shares; 2006 - 13,110,623 shares). Diluted earnings per share from continuing operations and diluted net earnings per share for the nine months ended September 30, 2007 and October 1, 2006 are based on the diluted weighted average common shares outstanding (2007 - 13,135,843 shares; 2006 - 13,125,499 shares). Note 7. Consolidated statements of cash flows The following is additional information to the statements of cash flows. Change in non-cash operating working capital Three months ended Nine months ended ---------------------------------------------- September October September October 30, 2007 1, 2006 30, 2007 1, 2006 ---------------------------------------------- Accounts receivable $ 3,907 $ 6,095 ($14,599) ($6,687) Inventories 1,210 550 152 10,069 Prepaid expenses 52 (685) (481) (1,709) Accounts payable and accrued liabilities (4,036) 293 805 (3,090) Restructuring charge - (351) (52) (866) Income taxes payable (2,664) 5,652 4,208 7,569 ---------------------------------------------- ($1,531) $ 11,554 ($9,967) $ 5,286 ---------------------------------------------- Note 8. Employee benefits The Company's net benefit plan expense, which is recorded in cost of sales and selling, general and administration expenses, is as follows: Three months ended Nine months ended ---------------------------------------------- September October September October 30, 2007 1, 2006 30, 2007 1, 2006 ---------------------------------------------- Pension benefit plans $ 655 $ 616 $ 1,963 $ 1,848 Other benefit plans 334 298 1,000 894 ---------------------------------------------- $ 989 $ 914 $ 2,963 $ 2,742 ---------------------------------------------- Note 9. Financial instruments Foreign exchange contracts The Company uses foreign currency forward contracts to manage well defined foreign exchange risks. In particular, the Company uses foreign exchange forward contracts to hedge certain future committed U.S. dollar and euro outflows and inflows. A decision support system is employed and hedges are put in place when technical signals indicate it is appropriate to do so. As such, there may be times when the Company has left a foreign currency exposure unhedged. At September 30, 2007 no such forward contracts to hedge firm commitments were in place. In addition, the Company uses forward contracts to manage foreign exchange risk arising from the translation of foreign currency denominated monetary assets. As at September 30, 2007, the Company has committed to sell a total of US$50,300 at an average exchange rate of 1.0008, with maturity dates in the fourth quarter of 2007. The Company has not elected to apply hedge accounting treatment for these forward contracts. Consequently, they are recognized on the balance sheet as part of accounts receivable at their fair value, with changes in fair value recognized in earnings. At September 30, 2007 the marked-to-market gain on these outstanding forward contracts totalled $297, which has been recorded in earnings. The Company has also entered into a series of foreign exchange forward contracts to purchase Chinese renminbi and euros in connection with the construction of a manufacturing facility in China. At September 30, 2007 the amount of outstanding forward contracts totalled 42 million Chinese renminbi at an average CAD/RMB exchange rate of 6.3855 with maturity dates from October 15, 2007 through March 14, 2008 and 2 million euros at an average EUR/CAD exchange rate of 1.5450 with maturity dates from October 15, 2007 through January 15, 2008. The Company has not elected to apply hedge accounting treatment for these forward contracts. Consequently, they are recognized on the balance sheet as part of accounts payable and accrued liabilities at their fair value, with changes in fair value recognized in earnings. At September 30, 2007 the marked-to-market loss on these outstanding forward contracts totalled ($1,192), which has been recorded in earnings. The Company's subsidiary in Hungary, Wescast Hungary Zrt., entered into a series of foreign exchange forward contracts to sell euros in exchange for Hungarian forints. Wescast Hungary Zrt. expects a net long euro position in 2007 due to the excess of sales denominated in euros less expenses denominated in euros. At September 30, 2007 the amount of outstanding forward contracts totalled 3 million euros at an average exchange rate to the Hungarian forint of 261.80 with maturity dates from October 31, 2007 through December 28, 2007. The Company has elected not to apply hedge accounting treatment for these forward contracts. Consequently, they are recognized on the balance sheet as part of accounts receivable at their fair value, with changes in fair value recognized in earnings. At September 30, 2007 the marked-to-market gain on these outstanding forward contracts totalled $165, which has been recorded in earnings. The Company does not purchase or hold derivative financial instruments for speculative purposes. The Company estimates fair value based on observable market data. Other derivative instruments To manage the electricity cost volatility that may arise since the Ontario, Canada electricity market was deregulated in May 2002, the Company enters into fixed-price forward contracts to purchase electricity. Due to various changes to Ontario government policy in the deregulated electricity market, the Company estimates that approximately 70% of the Ontario plants' electricity requirements will be purchased at prices mandated by the government. The Company continues to actively manage its remaining electricity cost volatility through the use of fixed-price forward contracts during the peak summer months. At September 30, 2007 no such forward contracts to manage electricity cost volatility were in place. To manage natural gas cost volatility, the Company enters into fixed-price forward contracts to purchase natural gas. The current contracts expire October 31, 2007 and August 31, 2008. There are approximately 159,021 gigajoules (GJ) at a weighted average price of $6.64 per GJ remaining. The estimated fair market value of these contracts as at September 30, 2007 was ($53). The Company has documented these contracts as normal purchase contracts in order to receive the expected usage exemption from treatment as derivatives. As such, these contracts have been accounted for as executory contracts; any gain or loss resulting from the contracts will be recognized in the statements of earnings upon contract settlement. The Company does not enter into electricity or natural gas contracts for speculative purposes. The Company estimates fair value based on observable market data. Note 10. Segment information The Company operates in the automotive industry in three geographic segments, North America, Europe and Asia. The Company's manufacturing facilities, where appropriate, are geographically situated to align with the physical location of its customer base. The Company evaluates segment performance based on earnings or loss before income taxes. The Company accounts for inter-segment sales at current market prices. All Corporate costs not directly allocated to the European or Asian operations have been allocated to the North American segment. Three months ended September 30, 2007 ------------------------------------- North Inter-segment America Europe Asia Eliminations Total -------- --------- --------- -------------- ---------- Sales to external customers $ 69,333 $ 22,687 $ 172 ($1,847) $ 90,345 Earnings (loss) from continuing operations (126) (1,135) (1,113) (37) (2,411) Investment income 166 - - - 166 Interest expense 187 - - - 187 Depreciation and amortization 5,566 2,420 37 - 8,023 Income taxes 1,512 18 5 - 1,535 Purchase of property, plant and equipment and other assets $ 2,048 $ 623 $ 7,388 $ - $ 10,059 Three months ended October 1, 2006 ---------------------------------- North Inter-segment America Europe Asia Eliminations Total -------- --------- --------- -------------- ---------- Sales to external customers $ 68,419 $ 19,084 $ - ($2,678) $ 84,825 Earnings (loss) from continuing operations (278) (652) (393) (55) (1,378) Investment income 106 - - - 106 Interest expense 345 - - - 345 Depreciation and amortization 7,271 1,946 1 - 9,218 Income taxes (261) 5 - - (256) Purchase of property, plant and equipment and other assets $ 1,371 $ 1,805 $ 5,646 $ - $ 8,822 Nine months ended September 30, 2007 ------------------------------------ North Inter-segment America Europe Asia Eliminations Total -------- --------- --------- -------------- ---------- Sales to external customers $ 220,219 $ 81,344 $ 213 ($6,117) $ 295,659 Earnings (loss) from continuing operations 4,525 431 (3,035) (59) 1,862 Investment income 365 - - - 365 Interest expense 582 - - - 582 Depreciation and amortization 17,584 7,382 108 - 25,074 Income taxes 6,422 51 8 - 6,481 Purchase of property, plant and equipment and other assets $ 6,099 $ 3,026 $ 21,065 $ - $ 30,190 Nine months ended October 1, 2006 --------------------------------- North Inter-segment America Europe Asia Eliminations Total -------- --------- --------- -------------- ---------- Sales to external customers $ 236,572 $ 56,524 $ - ($6,784) $ 286,312 Earnings (loss) from continuing operations 8,617 119 (624) (170) 7,942 Investment income 241 - - - 241 Interest expense 1,442 - - - 1,442 Depreciation and amortization 22,859 5,684 1 - 28,544 Income taxes 4,963 33 - - 4,996 Purchase of property, plant and equipment and other assets $ 9,656 $ 5,960 $ 5,646 $ - $ 21,262 September 30, 2007 ------------------ North Discontinued America Europe Asia Operations Total -------- --------- --------- -------------- ---------- Total Assets $ 285,840 $ 122,189 $ 34,963 $ 25 $ 443,017 Property, plant and equipment $ 168,666 $ 87,363 $ 29,943 $ - $ 285,972 --------------------------------------------------------------------------- December 31, 2006 ----------------- North Discontinued America Europe Asia Operations Total -------- --------- --------- -------------- ---------- Total Assets $ 303,554 $ 129,336 $ 11,620 $ 471 $ 444,981 Property, plant and equipment $ 180,426 $ 98,587 $ 8,284 $ - $ 287,297 Note 11. Comparative figures Certain of the comparative figures have been reclassified to conform with the presentation adopted at September 30, 2007. Specifically, an unrealized exchange loss on future taxes was reclassified from the change in non-cash operating working capital to a separate line item included in the operating section of the consolidated statements of cash flows. Management's Discussion and Analysis Of Results of Operations and Financial Position For the Three Months Ended September 30, 2007 All amounts in this Management's Discussion and Analysis of Results of Operations and Financial Position ("MD&A") are in Canadian dollars unless otherwise noted. This MD&A should be read in conjunction with: the interim consolidated financial statements and notes thereto for the three-month period ended September 30, 2007; the "Management's Discussion and Analysis" included in the Annual Report of Wescast for the year ended December 31, 2006; and with the consolidated financial statements and notes thereto for the year ended December 31, 2006. The accompanying interim consolidated financial statements and the notes thereto have not been reviewed by the Company's external auditors pursuant to a review engagement applying review standards set out in the CICA Handbook. This MD&A is current to October 30, 2007. Additional information relating to the Company is available online at SEDAR, www.sedar.com. Overview Wescast Industries Inc. ("Wescast" or the "Company") designs, casts, machines and assembles iron exhaust system components for automotive original equipment manufacturers ("OEMs") and Tier 1 customers for the car and light truck markets in North America, Europe and Asia. The Company employs approximately 1,900 people in 7 production facilities and 3 sales and design centres in Canada, the United States and Germany. The Company also has sales and technical design representation in the United Kingdom, France, Japan and China. The Company's resources are strategically located in geographic business units to meet unique, customer-specific requirements. The Company currently has North American and European full-service business units and is in the process of establishing an Asian business unit. The Company believes that the combination of its design capability and high-quality manufacturing creates unique value for the customers in the markets that it serves. The Company believes this is the reason that it is the world's leading supplier of cast iron exhaust manifolds for passenger cars and light truck applications. The Company is focused on the design and manufacture of exhaust system components for sale primarily to OEM and Tier 1 customers for application in the passenger car and light truck markets in North America, Europe and Asia. The Company's powertrain operations in North America are well established and consist of five production facilities. The European powertrain operations are conducted from a production facility in Hungary, through the Company's subsidiary Wescast Hungary Zrt. As part of Wescast's global strategy, the Company is developing a manufacturing presence in Asia and is in the process of constructing an integrated foundry and machining facility in China. The Company is currently operating in a leased facility in China. Current Market Conditions North American light vehicle production volumes for the quarter totalled approximately 3.5 million units, a 3.5% increase from the 3.4 million units produced during the same period in 2006. The Company's primary North American customer base, the domestic Big 3 automakers, experienced a lower increase of 1.4% compared to the same period in 2006. Results from Operations Consolidated Sales Consolidated sales for the quarter were $90.3 million, a 6.5% increase compared to the $84.8 million reported during the third quarter of 2006. The consolidated sales are net of inter-segment sales of $1.8 million between the Company's European and North American business units. The sales analysis presented for the business units is based on gross sales. On a year-to-date basis, consolidated sales of $295.7 million were 3.3% higher than the $286.3 million reported during the first nine months of 2006. The increase is a result of significantly higher sales generated by the Company's European operation, partially offset by lower sales in North America. Consolidated prototype and tooling sales in the third quarter were $2.8 million, up from the $1.8 million reported during the same quarter last year, reflecting changes in the number and timing of new customer programs. On a year-to-date basis, consolidated prototype and tooling sales were $10.1 million, compared to $14.3 million reported in 2006. North American Sales North American sales, excluding prototype and tooling sales, declined by 1.6% to $66.6 million compared to $67.7 million reported in the third quarter of last year. The North American operations experienced a quarter-over-quarter decline of approximately 3.0% in unit casting sales volume. Machining volumes were up 2.1% compared to the third quarter of 2006. The casting unit volume and sales decline resulted from: - The impact of market-driven price reductions compared to the same quarter last year; - A temporary reduction in volumes to Chrysler, due to their changeover from the current RS minivan platform to the new RT platform; - A reduction in light truck volume requirements for certain programs of the domestic Big 3, due in part to high fuel prices and competition from the new domestic automakers; and, - A reduction in the volume and demand requirements on programs with Nissan. The factors above were partially offset by increased volumes on certain programs with General Motors and Ford. A higher percentage of parts sold that were both cast and machined compared to 2006 also had a positive impact on North American sales. European Sales Sales generated by the Company's operation in Europe, excluding prototype and tooling sales, were up 25.7% to $22.6 million compared to $18.0 million during the third quarter of 2006. The operation achieved a quarter-over-quarter increase in casting unit sales volume of 6.2% . Total units machined were 33.3% higher than the third quarter of 2006. The increase in unit volume and sales compared to the third quarter of 2006 is the result of higher volumes for programs that were launched in 2006 and new programs that launched in 2007. Also contributing to the increased sales level was the impact of a stronger Hungarian forint against the Canadian dollar compared to the third quarter of 2006 and an increase in sales from machined only programs. The cost to acquire the raw castings for certain of these machined only programs is quite high, with the casting cost representing a direct pass through to the end customer. Market-driven price reductions partially offset the above positive factors. Gross Profit Consolidated gross profit for the quarter was $7.9 million, consistent with the $8.0 million reported in the third quarter of 2006. The Company's North American operations generated gross profit of $8.8 million in the third quarter of 2007, compared to $8.0 million generated in the same quarter last year. - The North American operations generated higher gross profit due to the effects of: - The net impact of a higher volume of parts sold that were both cast and machined which positively impacted part mix, market-driven price reductions and the foreign exchange impact of a stronger Canadian dollar that in total increased gross profit by $0.7 million compared to the third quarter of 2006; - Various restructuring efforts aimed at reducing the fixed costs associated with support functions; and, - Significantly lower depreciation expense, primarily related to the machining operations, which increased gross profit by $1.5 million compared to the third quarter of 2006. The impact of these factors was partially offset by the following negative factors: - Lower casting volumes; - Lower operating performance of the manufacturing facilities due to higher manufacturing scrap rates and equipment downtime; - Increased repairs and maintenance costs; and, - Higher raw material prices compared with 2006, specifically moly, which reduced gross profit by $1.0 million. The Company's European operations generated negative gross profit of $0.2 million for the quarter, compared to $0.04 million generated in 2006. The positive impact of increased casting and machining sales volumes was offset by increased depreciation expense due to capital investments made in 2006 and 2007 and higher raw material, electricity and payroll costs compared to the same quarter last year. Pre-launch expenditures of the Company's developing Asian business unit had a negative impact on gross profit of $0.7 million in the third quarter. On a year-to-date basis, the Company's reported gross profit of $36.5 million was down $1.7 million from the $38.2 million reported in the first nine months of 2006. Lower gross profit of the North American operations and the impact of the Asian expansion were partially offset by the improved performance of the Company's European operations on a year-to-date basis. Selling, General and Administration The Company's selling, general and administration expenses for the quarter were $7.4 million, comparable to the $7.5 million incurred in the same period in 2006. Included in these costs was depreciation of $0.6 million compared to $0.8 million in 2006. Excluding depreciation, the selling, general and administration expenses were $6.8 million, again comparable to the level reported in the third quarter of 2006. Higher legal expenses, severance costs and consulting costs related to process improvements and lean initiatives were reported for the quarter compared to 2006. A provision for bad debts to reflect the uncertainty in collection of a European customer account was also recorded. Expenses related to the establishment of the operation in China, and classified as selling, general and administration, were lower during the quarter compared to 2006. On a year-to-date basis, selling, general and administration expenses were $22.2 million, up $1.0 million from the $21.2 million reported in the first nine months of 2006. Most of this increase was attributable to the factors discussed above. Research, Development and Design The Company's research, development and design expenses were $1.9 million for the quarter, up $0.4 million from the $1.5 million reported in the same quarter of 2006. A significant portion of the increase was due to increased costs associated with development activities on alloys having the potential to provide product advantages such as the ability to withstand higher temperatures and other performance improvements. On a year-to-date basis, research, development and design expenses were $5.3 million, compared to $4.6 million reported in 2006. Most of this increase was due to the factors discussed above. Interest Expense Interest expense for the quarter of $0.2 million was down from the $0.3 million incurred over the same period in 2006. On a year-to-date basis, interest expense was $0.6 million compared to $1.4 million reported in 2006. The decline for the third quarter and on a year-to-date basis was due to lower debt balances carried in 2007 compared to 2006. Other (Income) Expense Other income for the quarter was $0.5 million, compared to other expense of $0.4 million reported in the same period last year. A significant portion of the $0.9 million change was due to net foreign exchange gains of $0.1 million reported in the quarter compared to net foreign exchange losses of $0.6 million reported in the same quarter last year. The significant components of the net foreign exchange gains reported in the third quarter were as follows: - The Company reported a foreign exchange loss of $0.5 million on foreign currency forward contracts entered into to hedge the construction costs of the integrated foundry and machining facility in China. The foreign currency forward contracts were entered into in January 2007 to purchase Chinese renminbi and euros in order to lock-in the Canadian dollar cost estimate associated with constructing the facility in China. The Company has not elected to apply hedge accounting treatment for these forward contracts given the strict criteria that must be maintained on an ongoing basis to achieve this accounting treatment. Both the Chinese renminbi and the euro weakened against the Canadian dollar during the third quarter. As such, the Company recognized a foreign exchange loss of $0.5 million in earnings. This loss was comprised of two components: 1) a loss of $0.6 million related to forward contracts that settled during the third quarter, and 2) a gain of $0.1 million related to the fair value adjustment of contracts that were outstanding at the end of the third quarter. - The Company reported a foreign exchange loss of $2.2 million, due to the significant strengthening of the Canadian dollar against the US dollar, on the translation of foreign denominated assets, principally related to a future income tax asset associated with a foreign subsidiary. This foreign exchange loss was not tax deductible. The Company uses forward contracts to manage the foreign exchange risk arising from the translation of this foreign denominated future income tax asset. As the translation gains or losses are not taxable, the forward contracts are entered into at levels such that the foreign exchange exposure is mitigated on a net after-tax basis. The Company reported a taxable foreign exchange gain of $3.3 million on these forward contracts during the third quarter, resulting in a net foreign exchange gain of $1.1 million reported in other (income) expense. On an after-tax basis, this loss and gain offset each other. - The Company reported foreign exchange losses of $0.5 million on the translation of foreign denominated monetary assets and monetary liabilities due to the strengthening of the Canadian dollar. On a year-to-date basis, other expense was $0.4 million compared to other income of $1.7 million reported in the first nine months of 2006. The majority of this change was due to differences in the level of foreign exchange gains and losses reported. Income Taxes Income tax expense of $1.5 million was reported in the third quarter even though the Company experienced a loss. The effective income tax recovery rate was 15.7% in the same quarter of 2006. The level of income tax expense for the third quarter was due to the following factors: - The Company recorded a foreign exchange loss of $2.2 million on the translation of foreign denominated future income tax assets of a foreign subsidiary. This foreign exchange loss was not tax deductible; consequently, no tax impact was recorded related to this loss in the third quarter of 2007; and, - No tax benefit has been recognized with respect to the losses realized by the operations in China or Hungary as these operations are subject to tax holidays which extend through 2011 or beyond. Quarterly Results The table below sets forth selected financial information of the Company for the eight most recent quarters. --------------------------------------------------------------------------- --------------------------------------------------------------------------- (unaudited; in thousands of Canadian dollars, except per share amounts) Third Quarter Second Quarter 2007 2006 2007 2006 Sales $ 90,345 $ 84,825 $ 101,266 $ 102,613 Earnings (loss) from continuing operations ($2,411) ($1,378) $ 1,176 $ 5,562 Net earnings (loss) ($2,381) ($1,399) $ 1,244 $ 5,276 Earnings (loss) from continuing operations per share Basic and diluted ($0.18) ($0.11) $ 0.09 $ 0.42 Net earnings (loss) per share Basic and diluted ($0.18) ($0.11) $ 0.09 $ 0.40 --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- (unaudited; in thousands of Canadian dollars, except per share amounts) First Quarter Fourth Quarter 2007 2006 2006 2005 Sales $ 104,048 $ 98,874 $ 84,686 $ 87,825 Earnings (loss) from continuing operations $ 3,097 $ 3,758 ($3,055) ($20,330) Net earnings (loss) $ 3,055 $ 3,696 ($3,563) ($20,543) Earnings (loss) from continuing operations per share Basic and diluted $ 0.24 $ 0.29 ($0.23) ($1.55) Net earnings (loss) per share Basic and diluted $ 0.23 $ 0.28 ($0.27) ($1.57) --------------------------------------------------------------------------- --------------------------------------------------------------------------- Notes: 1. The Company's sales and production volumes are generally lower in the third quarter, in comparison to the other quarters, as North American and European vehicle production are lowest during the third quarter due to model changeovers by the automakers. Also, the Company's facilities traditionally shut down for a period during the third quarter to allow for summer vacations. 2. Severance costs of $1.5 million related to structural changes to better align the capacity of the North American operations with customer volume requirements were recorded in the fourth quarter of 2006. 3. An asset impairment charge of $18.5 million after-tax, reflecting the impairment of the Brantford foundry assets, was recorded in the net loss of the fourth quarter of 2005. Financial Condition, Liquidity and Financial Resources At September 30, 2007 the Company had cash balances of $12.2 million and total debt of $5.6 million compared with cash balances of $16.1 million and total debt of $6.5 million at the end of 2006. Cash flows of $7.8 million generated from operations during the third quarter were lower than capital expenditures, net repayments of long-term debt and dividend payments, resulting in a $3.1 million decrease in cash balances on hand compared to the second quarter. Operating Activities The Company generated $7.8 million in cash from continuing operations during the third quarter, compared with $20.8 million in cash generated during the third quarter of 2006. The decline was primarily attributable to a lower change in non-cash operating working capital in the third quarter of 2007 compared to the third quarter of 2006 as well as lower earnings and depreciation expense year over year, offset by an increase in unrealized exchange losses on future tax assets. On a year-to-date basis, the Company generated $27.1 million in cash from continuing operations compared to $48.8 million generated in 2006. Again, the decline was due primarily to lower earnings and a lower change in non-cash operating working capital compared to 2006. Investing Activities Capital expenditures for the third quarter were $10.1 million, up from the $8.8 million incurred over the same quarter last year. Expenditures related to the establishment of the China facility totalled $7.4 million for the quarter. On a year-to-date basis, capital expenditures were $30.2 million compared to $21.3 million in 2006. The increase was due to capital expenditures incurred for the construction of the China facility. Financing Activities Net repayments of long-term debt during the quarter were $0.6 million compared to $9.7 million in the third quarter of 2006. The only long-term debt outstanding at September 30, 2007 was debt owed by United Machining Inc., a jointly controlled entity in which the Company has a 49% interest. Dividends paid during the quarter were $0.8 million or $0.06 per common share, consistent with the same period last year. Financing Resources The Company is well positioned to fund strategic initiatives with cash generated from operations and the utilization of available credit, if required. Wescast has a committed borrowing facility which matures on December 22, 2007. The Company is currently negotiating the renewal of the borrowing facility with its lenders. At September 30, 2007, the Company had no loans or advances against the facility other than outstanding letters of credit that count as drawings under the facility. Based on the current drawings under the facility and certain financial covenants that the Company must satisfy, approximately $58.7 million of unused credit was available to the Company at September 30, 2007. Shareholders' Equity Shareholders' equity at the end of the third quarter was $360.9 million, a decrease of $7.5 million from the $368.4 million at December 31, 2006. Net earnings generated during the first nine months of 2007 increased shareholders' equity by $1.9 million. Year-to-date dividends of $2.4 million ($0.18 per share) have been paid on the Class A and Class B shares. Accumulated other comprehensive income declined by $7.2 million during the first nine months of 2007. Other comprehensive income is a component of shareholders' equity that is now presented in accordance with a new accounting standard that the Company adopted at January 1, 2007. For Wescast, accumulated other comprehensive income consists of the unrealized change in the value of the Company's investments in its self-sustaining subsidiaries reporting in foreign currencies and translated to Canadian dollars at current rates of exchange. The significant change during the first nine months of 2007 resulted from exchange fluctuations associated with the Company's investment in Hungary due to the strengthening of the Canadian dollar against the Hungarian forint. Change in Accounting Policies Effective January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3855, Financial Instruments - Recognition and Measurement, Section 3865, Hedges, Section 1530, Comprehensive Income and Section 3861, Financial Instruments - Disclosure and Presentation. The adoption of the new standards requires changes in accounting for financial instruments and hedges as well as the recognition of certain transition adjustments. The Company had no such transition adjustments. The comparative consolidated financial statements have not been restated, except for the presentation of translation losses on self-sustaining foreign operations. For further details related to this change in accounting policy, see Note 2 to the interim consolidated financial statements for the three-month period ended September 30, 2007. Internal Control Over Financial Reporting There have been no changes in the Company's internal controls over financial reporting during the three-month period ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. Outstanding Share Data As at October 30, 2007, the Company had 5,759,139 Class A Subordinate Voting Shares and 7,376,607 Class B Common Shares outstanding. The Company also had outstanding stock options to acquire 502,056 Class A Subordinate Voting Shares. Outlook Current industry estimates project 2007 light vehicle production levels in North America will be approximately 15.0 million vehicles, down from 15.3 million vehicles produced in 2006. Industry estimates also predict a 4.0% decline in the market share of the domestic Big 3, the Company's primary North American customer base, during 2007. The Company's production volumes in North America in 2007 will not reach the levels achieved in 2006, a result of the lower production levels projected for its primary customer base. The Company expects that its production volumes in Europe will be significantly higher than 2006 due to product launches in 2007 and the ramp-up of programs launched during 2006. The Company has experienced significant market-driven downward price pressure from its customer base for some time. This pressure has intensified in recent years as some of these customers react to negative changes in their profitability and market share losses. This pressure has resulted in an increased frequency on the part of the domestic automakers to subject their supply requirements to ongoing market testing in relation to pricing; historically this form of price-driven market testing was done prior to a program entering production or following a major re-design. To date, the Company has had success in retaining major programs, or substantial portions of major programs, that have been subjected to these market tests. Through this process the Company has seen price reduction targets established by customers that exceed historic levels; the price targets reflect the impact on market pricing of new global price benchmarks being established by competitors located in low-cost countries. The Company's results are sensitive to raw material prices for scrap steel and moly, the pricing of which is heavily impacted by global demand. The Company expects its average scrap steel and moly prices for 2007 to be higher than the averages experienced in 2006. The Company's strategic direction is the pursuit of a global powertrain strategy capable of generating attractive growth and strong financial return prospects for its stakeholders: - The focus of the Company's North American business unit is on maintaining the dominant market position it currently holds within its segment of the powertrain marketplace. To do so the Company must remain globally cost competitive in order to respond to the significant pressure on pricing being exerted by its customer base. To meet this challenge the Company will continue to pursue aggressive year-over-year cost reduction targets in these operations. To achieve these targets the Company will continue to promote a culture of continuous improvement and innovation by applying its HEART participative management process to identify and implement "lean" initiatives. The Company has engaged the use of outside consulting resources to help accelerate the implementation of these improvements. - The Company has aligned its global capacity to meet the needs of its customers in the most efficient manner available. The foundry operations in Brantford, Ontario were closed during 2006. The Company has reduced its fixed costs as a result of the implementation of its foundry capacity optimization plan. With the Brantford foundry closure completed during 2006, additional incremental cost reductions have been realized during 2007. - The Company will continue to focus on expanding its powertrain business through the expansion of its customer base and geographic coverage. - The Company is committed to being able to offer its customers the highest quality, technologically advanced products at globally competitive prices. As a result, the Company will maintain its commitment to fund research and development activities so that it may respond with innovative product technology solutions provided through the use of innovative manufacturing techniques. These activities include: -- The continued development and deployment of materials that offer advantages such as the ability to withstand higher temperatures or provide other performance and cost advantages; and, -- Deploying solutions to customers that address their hot-end system requirements and to meet new, demanding emission regulations and requirements. - The Company's planned expansion into Asia is well underway. Construction of an integrated foundry and machining operation in Wuhan, Hubei Province, China which began in the second half of 2006 is nearing completion. Machining operations began during the first quarter of 2007, while the foundry is anticipated to be operational during the first quarter of 2008. Once established, the China operations will provide the Company with a global footprint of manufacturing, sales and engineering support in North America, Europe and Asia. The Company believes that maintaining focus on these areas is the best means to ensure the long-term success of its business. Forward-Looking Information The contents of this MD&A contain statements which, to the extent that they are not recitations of historical fact, may constitute forward-looking statements based on certain assumptions and reflect Wescast's current expectations. Such forward-looking statements may include financial and other projections as well as statements regarding Wescast's future plans, objectives or performance for the current period and subsequent periods. The words "may", "would", "could", "will", "likely", "expect", "anticipate", "estimate", "intend", "plan", "forecast", "project" and "believe" or other similar words and phrases are intended to identify forward-looking statements. Persons reading this MD&A are cautioned that such statements are only predictions, and that Wescast's actual future results or performance may be materially different. This information is based upon certain material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking statements, including our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties principally relate to the risks associated with the automotive industry and include, but are not limited to: our operating and/or financial performance, including the effect of new accounting standards on our reported financial results, fluctuations in interest rates, changes in consumer and business confidence levels, consumers' personal debt levels, vehicle prices, the extent and nature of purchasing or leasing incentive campaigns offered by automotive manufacturers, environmental emission regulations, fuel prices and availability, the continuation and extent of outsourcing by automotive manufacturers, changes in raw material and other input costs, our ability to continue to meet customer specifications relating to product performance, cost, quality, delivery and service, industry cyclicality or seasonality, trade and/or labour issues or disruptions, customer pricing pressures, pricing concessions and cost absorptions, actual levels of program production volumes by our customers compared to original expectations, including program cancellations or delays, price reduction pressures, dependence on certain engine programs and the market success and consumer acceptance of the vehicles into which such powertrain products are installed, our relationship with and dependence on certain customers, currency exposure, failures in implementing Wescast's strategy, technological developments by Wescast's competitors, government and regulatory policies and changes in the competitive environment in which Wescast operates. Wescast does not undertake any obligation to update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this MD&A or to reflect the occurrence of unanticipated events, except as required by law. Contacts: Wescast Industries Inc. Mr. Edward Frackowiak Chairman and Chief Executive Officer (519) 750-0000 Website: www.wescast.com Copyright 2007 Market Wire, Incorporated |