Wescast Industries Inc.
TSX : WCS.A

Wescast Industries Inc.

February 26, 2008 09:20 ET

Wescast Reports Fourth Quarter Results

BRANTFORD, ONTARIO--(Marketwire - Feb. 26, 2008) - Wescast Industries Inc. (TSX:WCS.A) today reported 2007 fourth quarter sales of $90.9 million and a net loss of $13.5 million. Included in the net loss was a one-time $9.8 million contingent loss which the Company recorded for potential income taxes and interest that may be owed as a result of income tax reassessments received that denied the income tax deduction of certain costs of prior years.

In light of the difficult automotive market conditions and fourth quarter results, the Company's Board of Directors has decided to suspend the payment of dividends. The Board of Directors will review the Company's dividend payment policy on a periodic basis.

Highlights

- The Company reported consolidated sales of $90.9 million, an increase of 7.4% compared to the $84.7 million reported in the fourth quarter of 2006, reflecting higher sales volumes in North America.

- The Company reported a loss of $0.6 million in the fourth quarter from continuing operations before income taxes and excluding the interest accrued on the tax reassessments, which was improved from the loss of $4.6 million reported in the same quarter last year.

- The Company recorded a one-time contingent loss of $9.8 million in the fourth quarter for income tax reassessments and related interest for the taxation years 2002 to 2006. The Company has filed an appeal with the Tax Court of Canada.

- The Company reported a net loss of $13.5 million for the quarter compared with a net loss of $3.6 million reported in the same quarter last year. For the fiscal year ended 2007, the Company reported a net loss of $11.5 million compared with net earnings of $4.0 million reported in 2006. Excluding the impact of the contingent loss of $9.8 million, the Company generated a net loss of $3.7 million for the fourth quarter and a net loss of $1.7 million for the fiscal year ended 2007.

- The net loss per share on a diluted basis for the fourth quarter was $1.03, compared with a net loss per share of $0.27 for the same period in 2006. For the fiscal year ended 2007, the Company reported a net loss per share on a diluted basis of $0.88, compared with net earnings per share of $0.31 reported in 2006. The $9.8 million contingent loss had a negative impact on the diluted net loss per share of $0.75.

- Income tax expense of $9.4 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 due mainly to the impact of the contingent loss recorded. Also, income tax benefits were not recorded on losses of $3.6 million in aggregate realized by the Company's European and Chinese operations.

- The Company's expansion into China continued during the fourth quarter. Trial manufacturing runs occurred during the fourth quarter and foundry production activities have commenced during the first quarter of 2008. During the fourth quarter, pre-launch expenditures represented a net loss of $1.5 million, compared to $0.8 million in 2006, and $12.2 million of capital expenditures were incurred.

- Cash increased by $4.1 million during the fourth quarter as cash flows of $21.2 million generated from operations were more than sufficient to fund a significant level of capital expenditures and dividend payments.

- The North American automotive industry experienced a 1.0% increase in light vehicle production levels in the fourth quarter of 2007 compared to the fourth quarter of 2006. The Detroit 3 automakers, the Company's primary North American customer base, experienced a 1.6% decline in their light vehicle production levels compared to the same period in 2006.

Operations

Consolidated Sales

Consolidated sales for the quarter were $90.9 million, a 7.4% increase compared to the $84.7 million reported during the fourth quarter of 2006. The consolidated sales are net of inter-segment sales of $1.5 million between the Company's North American, European and Asian business units. The sales analysis presented for the North American and European business units is based on gross sales.

Consolidated prototype and tooling sales in the fourth quarter were $1.5 million, up from the $1.4 million reported during the same quarter last year.

North American Sales

North American sales, excluding prototype and tooling sales, increased by 9.0% to $68.7 million compared to $63.0 million reported in the fourth quarter of last year. The North American operations experienced a quarter-over-quarter increase of approximately 3.0% in unit casting sales volume. Machining volumes were up 7.7% compared to the fourth quarter of 2006. The unit volume and sales increase resulted from:

- The impact of increased volumes for new programs with General Motors and Ford for which production started in the fourth quarter of 2006;

- An increase in light truck volume requirements for certain programs of the Detroit 3 compared to 2006; and,

- The impact of a positive change in product mix as a higher percentage of parts were both cast and machined compared to the fourth quarter of 2006.

The factors above were partially offset by the combined negative impact of foreign exchange, as the Canadian dollar was significantly stronger against the US dollar, and market driven price reductions.

European Sales

Sales generated by the Company's operation in Europe, excluding prototype and tooling sales, were $22.0 million, comparable to the $22.3 million reported during the fourth quarter of 2006.

The operation achieved a quarter-over-quarter increase in casting unit sales volume of 4.8%. Total units machined were 21.8% higher than the fourth quarter of 2006. The increase in casting and machining volumes was more than offset by customer price reductions, the impact of the strengthening Canadian dollar against the US dollar, euro, and Hungarian forint and negative changes in product mix resulting from increased volumes for certain low margin programs.

Consolidated Earnings (Loss)

The Company reported a net loss from continuing operations of $13.5 million for the fourth quarter, compared with a net loss of $3.1 million reported in the same quarter last year. Excluding the $9.8 million one-time contingent loss, the net loss from continuing operations for the fourth quarter was $3.7 million.

North American Earnings (Loss)

The Company's North American operations reported a net loss of $10.3 million, compared with a net loss of $1.6 million reported in the fourth quarter of 2006. Excluding the impact of the contingent loss reported the North American operation realized a net loss of $0.5 million.

Earnings before income taxes and excluding the contingent loss were $2.7 million for the quarter compared to a loss before income taxes of $3.2 million reported in the same period last year. The improvement was due mainly to:

- Higher casting and machining volumes;

- Improved operating performance of the manufacturing facilities which resulted in lower manufacturing scrap rates and lower labour costs compared to the fourth quarter of 2006;

- Lower severance costs compared to the fourth quarter of 2006;

- Various restructuring efforts aimed at reducing the fixed costs associated with support functions;

- Lower external consulting costs; and,

- Lower depreciation expense, primarily related to the machining operations, which increased gross profit by $1.3 million compared to 2006.

The impact of these factors was partially offset by the following negative factors:

- The net impact of changes in product mix and market driven price reductions which reduced gross profit by $0.6 million compared to the fourth quarter of 2006;

- Higher raw material prices compared with 2006, which reduced gross profit by $1.5 million; and,

- Losses on the disposal of equipment and equipment write-downs totalling $1.9 million, compared to gains on the disposal of equipment of $0.4 million recorded during the fourth quarter of 2006.

European Earnings (Loss)

The Company's European operations generated a net loss for the fourth quarter of $1.8 million compared to a net loss of $0.7 million reported in the same quarter last year.

The decline in profitability of the European operation was due to the following:

- A provision for bad debts of $0.8 million 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.

Selling, General and Administration

The Company's selling, general and administration expenses for the quarter were $5.6 million, compared to $7.3 million reported in the fourth quarter of 2006. Lower external consulting fees and credit insurance costs contributed to this decline. In addition, 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. Partially offsetting these factors was a provision for bad debts to reflect the uncertainty in collection of a European customer account.

Research, Development and Design

The Company's research, development and design expenses were $2.3 million for the quarter, up $0.4 million from the $1.9 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, such as stainless steel, having the potential to provide product advantages such as the ability to withstand higher temperatures and other performance improvements.

Other (Income) Expense

Other expense for the quarter was $4.1 million, compared to other expense of $0.3 million reported in the same period last year. The most significant factor causing the increase was the accrued interest of $3.5 million that was recorded as part of the one-time contingent loss and reported as other expense.

Income Taxes

Income tax expense of $9.4 million was reported in the fourth quarter even though the Company experienced a loss. The effective income tax recovery rate was 33.5% in the same quarter of 2006. The level of income tax expense for the fourth quarter was impacted by the following factors:

- The Company recorded a one-time contingent loss of $9.8 million during the quarter; $6.3 million was recorded as income tax expense and $3.5 million was accrued non-tax deductible interest.

- Income tax benefits were not recorded on losses of $3.6 million in aggregate realized by the Company's European and Chinese operations. These operations are subject to tax holidays which extend through 2011 or beyond.

- The reduction of future federal income tax rates in Canada during the quarter increased future income tax expense as the future benefit from the Company's net future income tax assets has been reduced.

Financial Condition, Liquidity and Financial Resources

At December 30, 2007 the Company had cash balances of $16.4 million and total debt of $5.8 million compared with cash balances of $16.1 million and total debt of $6.5 million at the end of 2006.

Cash flows of $21.2 million generated from operations during the fourth quarter were higher than capital expenditures and dividend payments, resulting in a $4.1 million increase in cash balances on hand compared to the third quarter.

Operating Activities

The Company generated $21.2 million in cash from operations during the fourth quarter, compared with $16.1 million in cash generated during the fourth quarter of 2006. The increase was mainly attributable to higher cash generated from working capital in the fourth quarter of 2007 compared to same period of 2006; partially offset by lower net earnings reported in the quarter compared to the fourth quarter of 2006. The primary contributors to the higher cash generated from working capital was an increase in income taxes payable in the fourth quarter, due to the contingent loss recorded, and reduced inventory builds in the fourth quarter of 2007 versus the year earlier period, offset by higher receivable balances at the end of 2007 compared to the end of 2006. Inventory builds were lower in Europe in the fourth quarter of 2007 compared to 2006 as new program ramp ups decelerated compared to a year ago.

Investing Activities

Capital expenditures for the fourth quarter were $16.3 million, up from the $7.2 million incurred over the same quarter last year. Expenditures related to the establishment of the China facility totalled $12.2 million for the quarter.

Financing Activities

Net proceeds of $0.3 million related to draws on working capital loans were received during the fourth quarter. Net repayments of long-term debt during the fourth quarter of 2006 were $3.0 million. 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.

During the fourth quarter of 2007, the Company amended its credit agreement to reduce the revolving total commitment under the credit facility from $90 million to $65 million. The amended facility features a springing security clause, which requires the Company to provide security to its lenders if certain financial ratios are not maintained. The springing security clause would consist of a security interest in all of the personal property of the Company and certain material subsidiaries. At December 30, 2007, the springing security clause was not triggered based on the Company's financial ratios. Also, 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 $61.6 million of unused credit was available to the Company at December 30, 2007. The facility expires February 29, 2008. The Company is currently negotiating an extension to the facility with its lenders.

Shareholders' Equity

Shareholders' equity at the end of the fourth quarter was $347.7 million, a decrease of $20.7 million from the $368.4 million at December 31, 2006. The net loss reported during 2007 decreased shareholders' equity by $11.5 million. Year-to-date dividends of $3.1 million ($0.24 per share) have been paid on the Class A and Class B shares. Accumulated other comprehensive income declined by $6.1 million during 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 and the unrealized gains or losses on derivative instruments designated as cash flow hedges. The significant change during 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.

Outlook

2007 North American light vehicle production of 15.0 million vehicles was down 1.5% from the level experienced in 2006. The current industry estimates for 2008 project further production declines to a level of 14.5 million vehicles, down 3.7% from 2007. The Company's production volumes in North America in 2008 will not reach the levels achieved in 2007, as a result of lower production levels projected for its primary customer base. The Company expects that its production volumes in Europe in 2008 will be higher than 2007.

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 2008 to be higher than the averages experienced in 2007.

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 continue to strive to be 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 will continue to focus on expanding its powertrain business through the expansion of its customer base and geographic coverage. To this end, the Company acquired all of the net assets of its US based jointly controlled entity, United Machining Inc., during the fourth quarter for nominal consideration.

- 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, such as stainless steel, 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 progressing well. Construction of an integrated foundry and machining operation in Wuhan, Hubei Province, China which began in the second half of 2006 is essentially complete. Machining operations began during the first quarter of 2007, and limited foundry production has started during the first quarter of 2008. The Company now has 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.

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 5 sales and design centres in Canada, Hungary, the United States, Germany, Japan and China. The Company also has sales and technical design representation in the United Kingdom and France. 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. Forward-looking statements are provided for the purpose of providing information about management's current expectations and plans relating to the future. Persons reading this news release are cautioned that such information may not be appropriate for other purposes. 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:

February 27, 2008

3:00 p.m. EST

To participate, please dial: North America 1-888-300-0053; International 1-647-427-3420. Conference ID# 34931840 (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 February 27, 2008 to March 5, 2008, to access please dial 1-800-766-3146 (International: 1-402-220-7733) and enter pass code 34931840.



Wescast Industries Inc.
Consolidated Statements of Earnings and Retained Earnings
(in thousands of Canadian dollars, except per share amounts) (Unaudited)


Three months ended Twelve months ended
-------------------------------------------------
December December December December
30, 2007 31, 2006 30, 2007 31, 2006
-------------------------------------------------

Sales $ 90,914 $ 84,686 $ 386,573 $ 370,998
Cost of sales 83,119 79,822 342,259 327,933
-------------------------------------------------

Gross profit 7,795 4,864 44,314 43,065
Selling, general and
administration 5,586 7,300 27,812 28,486
Research, development and
design 2,293 1,892 7,637 6,477
-------------------------------------------------

(84) (4,328) 8,865 8,102
-------------------------------------------------

Other (income) expense
Interest expense 190 176 772 1,618
Investment income (343) (217) (708) (458)
Other (Note 8) 4,140 308 4,529 (1,401)
-------------------------------------------------
3,987 267 4,593 (241)
-------------------------------------------------

Earnings (loss) from
continuing operations
before income taxes (4,071) (4,595) 4,272 8,343
Income taxes (Note 4) 9,395 (1,540) 15,876 3,456
-------------------------------------------------

Earnings (loss) from
continuing operations (13,466) (3,055) (11,604) 4,887
Net earnings (loss) from
discontinued operations - (508) 56 (877)
-------------------------------------------------
-------------------------------------------------

Net earnings (loss) ($13,466) ($3,563) ($11,548) $ 4,010
-------------------------------------------------
-------------------------------------------------

Earnings (loss) from
continuing operations
per share (Note 6)
- Basic and diluted ($1.03) ($0.23) ($0.88) $ 0.37
-------------------------------------------------
-------------------------------------------------

Net earnings (loss) per
share (Note 6)
- Basic and diluted ($1.03) ($0.27) ($0.88) $ 0.31
-------------------------------------------------
-------------------------------------------------

Retained earnings,
beginning of period $ 257,622 $ 262,418 $ 258,068 $ 257,206
Net earnings (loss) (13,466) (3,563) (11,548) 4,010
Dividends paid (788) (787) (3,152) (3,148)
-------------------------------------------------
Retained earnings, end of
period $ 243,368 $ 258,068 $ 243,368 $ 258,068
-------------------------------------------------
-------------------------------------------------



Wescast Industries Inc.
Consolidated Statements of Comprehensive Income
(in thousands of Canadian dollars) (Unaudited)


Three months ended Twelve months ended
-------------------------------------------------------
December 30, December 31, December 30, December 31,
2007 2006 2007 2006
-------------------------------------------------------
Net earnings (loss) ($13,466) ($3,563) ($11,548) $ 4,010

Other comprehensive
income (loss), net
of income taxes:

Change in unrealized
gains (losses) on
translating financial
statements of self
sustaining foreign
operations 529 17,597 (6,638) 12,419

Change in unrealized
gains on derivative
instruments designated
as cash flow hedges 509 - 509 -
-------------------------------------------------------

Comprehensive income
(loss) ($12,428) $ 14,034 ($17,677) $ 16,429
-------------------------------------------------------
-------------------------------------------------------



Wescast Industries Inc.
Consolidated Balance Sheets
(in thousands of Canadian dollars) (Unaudited)

As at
December 30, 2007 December 31, 2006
---------------------------------------

Assets
Current
Cash $ 16,386 $ 16,071
Accounts receivable 62,985 54,880
Inventories 33,128 33,200
Prepaid expenses 1,790 2,067
Future income taxes 1,050 1,430
Current assets - discontinued
operations - 63
---------------------------------------
115,339 107,711

Property, plant and equipment 293,187 287,297
Future income taxes 32,637 43,530
Assets held for sale 2,749 4,969
Long-term assets - discontinued
operations - 408
Other assets 455 1,066
---------------------------------------
$ 444,367 $ 444,981
---------------------------------------
---------------------------------------

Liabilities and Shareholders' Equity
Current
Accounts payable and accrued
liabilities $ 44,292 $ 37,288
Income taxes payable (Note 4) 13,314 167
Current portion of long-term debt 3,143 1,672
Restructuring charge - 52
Future income taxes 131 123
Current liabilities - discontinued
operations - 147
---------------------------------------
60,880 39,449

Long-term debt 2,627 4,822
Deferred government assistance 2,529 3,081
Future income taxes 8,752 9,925
Employee benefits 21,873 19,307
---------------------------------------
96,661 76,584
---------------------------------------
Contingency (Note 4)

Shareholders' Equity
Capital stock (Note 3) 110,937 110,816
Retained earnings 243,368 258,068
Share purchase loans (132) (149)
Accumulated other comprehensive
income (loss) (Note 5) (6,467) (338)
---------------------------------------

347,706 368,397
---------------------------------------

$ 444,367 $ 444,981
---------------------------------------
---------------------------------------



Wescast Industries Inc.
Consolidated Statements of Cash Flows
(in thousands of Canadian dollars) (Unaudited)

Three months ended Twelve months ended
-----------------------------------------------
December December December December
30, 2007 31, 2006 30, 2007 31, 2006
-----------------------------------------------

Cash derived from
(applied to):
Operating
Earnings (loss) from
continuing operations ($13,466) ($3,055) ($11,604) $ 4,887
Add (deduct) items not
affecting cash:
Depreciation and
amortization 8,085 9,460 33,159 38,004
Unrealized exchange loss
(gain) on future tax assets 424 (1,807) 6,006 (336)
Future income taxes 1,220 (149) 4,058 3,039
Loss (gain) on disposal
of equipment 1,914 (355) 1,979 (423)
Deferred government
assistance (78) 375 (552) 852
Stock-based compensation,
net of payments - - - (18)
Employee benefits, net of
payments 424 655 2,564 2,666
-----------------------------------------------
(1,477) 5,124 35,610 48,671
Change in non-cash
operating working
capital (Note 7) 22,763 10,914 12,433 16,455
-----------------------------------------------
21,286 16,038 48,043 65,126
Discontinued operations (47) 48 (76) (191)
-----------------------------------------------
21,239 16,086 47,967 64,935
-----------------------------------------------
Investing
Purchase of property,
plant and equipment and
other assets (16,331) (7,244) (46,521) (28,506)
Proceeds on disposal of
equipment 557 741 1,523 2,236
Discontinued operations - 2,942 494 3,117
-----------------------------------------------
(15,774) (3,561) (44,504) (23,153)
-----------------------------------------------
Financing
Issue of long-term debt 822 2,342 3,101 22,728
Payments of long-term
debt principal (564) (5,310) (2,740) (50,107)
Payments under capital
lease obligations (1) (30) (14) (116)
Issuance of common shares 40 55 121 169
Employee share purchase
loan payments 8 29 17 76
Dividends paid (788) (787) (3,152) (3,148)
-----------------------------------------------
(483) (3,701) (2,667) (30,398)
-----------------------------------------------

Effect of exchange rate
changes on cash (844) 2,998 (481) 2,743
-----------------------------------------------

Net increase in cash 4,138 11,822 315 14,127
Cash
Beginning of period 12,248 4,249 16,071 1,944
-----------------------------------------------
End of period $ 16,386 $ 16,071 $ 16,386 $ 16,071
-----------------------------------------------
-----------------------------------------------


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 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.

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 derivatives as held for trading. Accounts receivable 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.

Transaction costs related to financial liabilities, classified as other than held for trading, are recorded as a reduction in the carrying value of the long-term debt and included in the amortized cost measurement. Transaction costs incurred for the Company's credit facility have been recorded as other non-current assets and are amortized over the term of the arrangement.

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 and the combined contract is not recorded at fair value. 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.

The Company enters into certain non-financial instrument contracts which contain embedded foreign currency derivatives. Where the contract is not leveraged, does not contain an option feature and is denominated in a currency that is commonly used in the economic environment where the transaction takes place, the embedded derivative is not accounted for separately from the host contract.

c) Comprehensive income

Comprehensive income is composed of the Company's net earnings 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 investment 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

The Company has certain hedging relationships that qualify for hedge accounting treatment. At the inception of these hedging relationships, the Company documents the relationship between the hedging instrument and the hedged item, its risk management objective and its strategy for undertaking the hedge. The Company also requires a documented assessment, both at hedge inception and on an ongoing basis, of whether or not the derivatives that are used in hedging transactions are highly effective in offsetting the changes attributable to the hedged risks in the cash flows of the hedged items.

Under the previous standards, derivatives that met the requirements for hedge accounting were generally accounted for on an accrual basis. Under the new standards, these derivatives are recorded at fair value and are recorded in accounts receivable or accounts payable and accrued liabilities. The Company's hedges are classified as cash flow hedges of the variability in highly probable future cash flows attributable to a forecasted transaction.

A subsidiary of the Company is exposed to variability in future revenue cash flows, as much of its revenues are denominated in Euros. The amount and timing of future cash flows are projected for the current year. The actual foreign currency revenue over time forms the basis for identifying the effective portion of gains and losses on the derivatives designated as cash flow hedges on forecasted transactions.

The effective portion of changes in fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. Any gains or losses in fair value relating to the ineffective portion are recognized immediately in the statement of earnings in other income (expense).

Amounts accumulated in other comprehensive income are reclassified to the statements of earnings in the period in which the hedged transaction occurs.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in other comprehensive income at that time remains in other comprehensive income until the forecasted transaction is eventually recognized in the statements of earnings. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to the statements of earnings. The Company did not have any hedges in place upon adoption of this section.



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")


December 30, December 31,
2007 2006
------------------------------

Issued and outstanding
5,760,661 Class A shares (2006 - 5,751,648) $98,510 $98,389
7,376,607 Class B shares (2006 - 7,376,607) 12,427 12,427
------------------------------
$110,937 $110,816
------------------------------
------------------------------


Note 4. Contingency

During the year, the Company received notices of reassessments from the Canada Revenue Agency ("CRA") and the Ministry of Finance ("Ministry") related to its 2002 taxation year. The reassessments denied the income tax deduction of certain payments totalling $13,180 which were paid to the Company's foreign affiliate. The potential amount owing for the 2002 taxation year, including interest, as a result of these reassessments is $6,166. This amount has been paid to avoid future interest charges. The Company received confirmation during the fourth quarter that the notice of objection of the reassessments which was filed was not successful. The Company has now filed a notice of appeal with the Tax Court of Canada.

Similar payments of $17,322 were paid to the Company's foreign affiliate during 2003 to 2006. The total estimated income taxes and related interest that may be owed if the Company's appeal to the Tax Court of Canada is not successful is $13,850. At December 30, 2007, the Company has accrued the total potential liability. In the fourth quarter the Company recorded a contingent loss of $9,847, representing the total potential loss of $13,850 less the amount that had been reserved for in prior years. Of the $9,847 loss, $6,277 was recorded as income tax expense and $3,570 was recorded in other (income) and expense. Income taxes payable includes $7,684 related to this matter which represents the total potential liability less the amount already paid related to the 2002 taxation year.



Note 5. Accumulated other comprehensive income (loss)


Three months ended December 30, 2007
------------------------------------
Unrealized gains
(losses) on
translating financial
Unrealized gains on statements of self-
derivative instruments sustaining foreign
designated as cash flow operations
hedges Total
---------------------------------------------------------
Balance, as at
October 1, 2007 $- ($7,505) ($7,505)
Aggregate
adjustments
during
the quarter 509 529 1,038
--------------------------------------------------------
Balance, as at
December 30,
2007 $509 ($6,976) ($6,467)
--------------------------------------------------------
--------------------------------------------------------



Twelve months ended December 30, 2007
-------------------------------------
Unrealized losses
on translating
Unrealized gains on financial statements
derivative instruments of self-sustaining
designated as cash flow foreign operations
hedges Total
--------------------------------------------------------
Balance, as at
January 1, 2007 $- ($338) ($338)
Aggregate
adjustments during
the year 509 (6,638) (6,129)
--------------------------------------------------------
Balance, as at
December 30, 2007 $509 ($6,976) ($6,467)
--------------------------------------------------------
--------------------------------------------------------


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 December 30, 2007 and December 31, 2006 are based on the weighted average common shares outstanding (2007 - 13,122,347 shares; 2006 - 13,113,323 shares). Diluted earnings (loss) per share from continuing operations and diluted net earnings (loss) per share for the three months ended December 30, 2007 and December 31, 2006 are based on the diluted weighted average common shares outstanding (2007 - 13,137,223 shares; 2006 - 13,128,199 shares).

Basic earnings (loss) per share from continuing operations and basic net earnings (loss) per share for the twelve months ended December 30, 2007 and December 31, 2006 are based on the weighted average common shares outstanding (2007 - 13,122,392 shares; 2006 - 13,113,379 shares). Diluted earnings (loss) per share from continuing operations and diluted net earnings (loss) per share for the twelve months ended December 30, 2007 and December 31, 2006 are based on the diluted weighted average common shares outstanding (2007 - 13,137,268 shares; 2006 - 13,128,255 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 Twelve months ended
-----------------------------------------------
December December December December
30, 2007 31, 2006 30, 2007 31, 2006
-----------------------------------------------

Accounts receivable $6,494 $11,729 ($8,105) $5,042
Inventories 6 (3,729) 158 6,340
Prepaid expenses 758 1,476 277 (233)
Accounts payable and accrued
liabilities 6,566 3,292 7,008 457
Restructuring charge - - (52) (866)
Income taxes payable 8,939 (1,854) 13,147 5,715
-----------------------------------------------
$22,763 $10,914 $12,433 $16,455
-----------------------------------------------



Note 8. Other (income) expense

Three months ended Twelve months ended
------------------------------------------------------
December 30, December 31, December 30, December 31,
2007 2006 2007 2006
------------------------------------------------------
Foreign exchange
translation
loss (gain) $195 $548 $1,623 ($326)
Interest on income
tax reassessments
(Note 4) 3,570 - 3,570 -
Miscellaneous (1,539) 115 (2,643) (652)
Loss (gain) on
disposal of
equipment 1,914 (355) 1,979 (423)
------------------------------------------------------
$4,140 $308 $4,529 ($1,401)
------------------------------------------------------



Note 9. 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 Twelve months ended
---------------------------------------------------
December 30, December 31, December 30, December 31,
2007 2006 2007 2006
---------------------------------------------------

Pension benefit plans $342 $646 $2,305 $2,494
Other benefit plans 352 298 1,352 1,192
---------------------------------------------------
$694 $944 $3,657 $3,686
---------------------------------------------------


Note 10. 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. These forward contracts are not eligible for hedge accounting and consequently, are recognized on the balance sheet at their fair value, with changes in fair value recognized in earnings. 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 December 30, 2007 no such cash flow hedges 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 December 30, 2007, the Company has committed to sell a total of US$48,200 at an average exchange rate of 0.9754, with maturity dates in the first quarter of 2008. These contracts are not eligible for hedge accounting and, consequently, are recognized on the balance sheet at their fair value, with changes in fair value recognized in earnings. At December 30, 2007 the marked-to-market loss on these outstanding forward contracts totalled $106 (2006 - $326), which has been recorded in earnings.

During 2007 the Company entered into a series of foreign exchange forward contracts to purchase Chinese renminbi and euros in connection with the construction of a manufacturing facility and administrative offices in Wuhan, China. These contracts are not eligible for hedge accounting and, consequently, are recognized on the balance sheet at their fair value, with changes in fair value recognized in earnings. At December 30, 2007 there were outstanding contracts to purchase 13 million Chinese renminbi at an average CAD/RMB exchange rate of 6.3407, and to purchase 0.5 million euros at an average EUR/CAD exchange rate of 1.5449 with maturity dates in the first quarter of 2008. At December 30, 2007 the marked-to-market loss on these outstanding RMB and EUR forward contracts totalled $320, which has been recorded in earnings.

During 2007 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 due to the excess of sales denominated in euros less expenses denominated in euros. At December 30, 2007 there were outstanding forward contracts to sell 18.1 million euros, with maturity dates from January 10, 2008 through December 10, 2008 at an average exchange rate to the Hungarian forint of 261.70. These forward contracts are designated and documented as cash flow hedges and are eligible for hedge accounting treatment. As such, the effective portion of gains and losses on these forward contracts will be recognized in the same period as, and as part of, the hedged transaction while the ineffective portion will be recorded in earnings immediately. At December 30, 2007 there was no ineffectiveness related to these forward contracts recorded in earnings. The amount recorded in other comprehensive income related to these forward contracts that is expected to be reclassified to earnings in 2008 is a gain of $509.

Subsequent to December 30, 2007 Wescast Hungary Zrt. entered into a forward contract to sell euros in exchange for Hungarian forints in order to manage foreign exchange risk arising from the revaluation of foreign denominated working capital. The forward contract totalled 5 million euros, matures on March 28, 2008, and has an average rate to the Hungarian forint of 256.50. This contract is not eligible for hedge accounting and, consequently, will be recognized on the balance sheet at its fair value, with changes in fair value recognized in earnings.

The Company does not purchase or hold derivative financial instruments for speculative purposes. The fair values of the foreign exchange contracts are based on market information from major financial institutions.

Other derivative instruments

To manage the electricity cost volatility that may arise; 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 December 30, 2007 there were no outstanding fixed-price forward contracts to purchase electricity.

To manage natural gas cost volatility, the Company enters into fixed-price forward contracts to purchase natural gas. The current contracts expire August 31, 2008 and October 31, 2008. The estimated fair market value of these contracts as at December 30, 2007 was a loss of $103. The Company has documented these contracts as normal purchase contracts in order to receive the expected usage exemption. 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 market value based on available indicative pricing.

Fair value of other financial instruments

The methods and assumptions used to estimate the fair value of financial instruments are described below:

Cash, accounts receivable, and accounts payable and accrued liabilities

Due to the short-term period to maturity of the instruments, the carrying values as presented in the consolidated balance sheets are reasonable estimates of fair value.

Long-term debt

The fair values of the Company's long-term debt, based on current rates for debt with similar terms and maturities, are not materially different from their carrying value.

Credit risk

The Company's financial assets that are exposed to credit risk consist primarily of cash, accounts receivable, director and employee share purchase plan loans and foreign exchange forward, electricity and natural gas contracts.

The Company, in the normal course of business, is exposed to credit risk from its customers, substantially all of which are in the automotive industry. These accounts receivable are subject to normal industry credit risks. The Company believes that this exposure has been adequately reflected in these financial statements. Any potential future risk will be mitigated by customer credit assessments, credit insurance or credit derivatives purchased on selected customer accounts and strict adherence to negotiated terms and conditions on sale, including cash on delivery.

The director and employee share purchase plan loans are secured by the underlying shares.

The Company is also exposed to credit risk from the potential default by any of its counterparties on its foreign exchange forward contracts and electricity and natural gas contracts. The Company mitigates this credit risk by dealing with counterparties who are major financial institutions and/or are included on an authorized list of counterparties maintained by the Company.

Interest rate risk

The Company's exposure to interest rate risk relates to its variable interest rate financing. At December 30, 2007 the increase or decrease in annual interest costs on the variable interest rate financing amounts to $56 for each 1% absolute change in interest rates.

Note 11. 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 December 30, 2007
------------------------------------

North Inter-segment
America Europe Asia Eliminations Total
---------------------------------------------------
Sales to external
customers $69,587 $22,643 $214 ($1,530) $90,914
Earnings (loss) from
continuing operations (10,329) (1,786) (1,509) 158 (13,466)
Investment income 343 - - - 343
Interest expense 190 - - - 190
Depreciation and
amortization 5,615 2,416 54 - 8,085
Income taxes 9,421 (22) (4) - 9,395
Purchase of property,
plant and equipment
and other assets $3,445 $732 $12,154 $- $16,331



Three months ended December 31, 2006
------------------------------------

North Inter-segment
America Europe Asia Eliminations Total
------------------------------------------------------
Sales to external
customers $63,454 $23,303 $16 ($2,087) $84,686

Earnings (loss) from
continuing operations (1,617) (666) (842) 70 (3,055)

Investment income 217 - - - 217

Interest expense 176 - - - 176

Depreciation and
amortization 7,100 2,320 40 - 9,460

Income taxes (1,565) 34 (9) - (1,540)

Purchase of
property, plant
and equipment
and other assets $1,225 $2,377 $3,642 $- $7,244



Twelve months ended December 30, 2007
-------------------------------------

North Inter-segment
America Europe Asia Eliminations Total
------------------------------------------------------
Sales to external
customers $289,808 $103,986 $426 ($7,647) $386,573
Earnings (loss) from
continuing
operations (5,803) (1,355) (4,545) 99 (11,604)

Investment income 708 - - - 708

Interest expense 772 - - - 772

Depreciation and
amortization 23,199 9,798 162 - 33,159

Income taxes 15,843 29 4 - 15,876

Purchase of
property, plant
and equipment
and other assets $9,543 $3,758 $33,220 $- $46,521



Twelve months ended December 31, 2006
-------------------------------------

North Inter-segment
America Europe Asia Eliminations Total
------------------------------------------------------

Sales to external
customers $300,016 $79,827 $121 ($8,966) $370,998

Earnings (loss) from
continuing operations 6,979 (548) (1,444) (100) 4,887

Investment income 458 - - - 458

Interest expense 1,618 - - - 1,618

Depreciation and
amortization 29,950 8,004 50 - 38,004

Income taxes 3,380 67 9 - 3,456

Purchase of
property, plant
and equipment
and other assets $10,881 $8,337 $9,288 $- $28,506



December 30, 2007
-----------------

Discontinued
North America Europe Asia Operations Total
------------------------------------------------------
Total Assets $274,723 $123,517 $46,127 $- $444,367
Property, plant and
equipment $165,361 $86,017 $41,809 $- $293,187
---------------------------------------------------------------------------

December 31, 2006
-----------------

Discontinued
North 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 12. Comparative figures

Certain of the comparative figures have been reclassified to conform with the presentation adopted at December 30, 2007. Specifically, an unrealized exchange gain on future tax assets 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. Also, the effect of exchange rate changes on cash was reclassified from the change in non-cash operating working capital to a separate line item in the consolidated statements of cash flows.

Contact Information

  • Wescast Industries Inc.
    Mr. Edward Frackowiak
    Chairman and Chief Executive Officer
    (519) 750-0000
    Website: www.wescast.com