Wescast Industries Inc.
TSX : WCS.A

Wescast Industries Inc.

October 31, 2006 16:15 ET

Wescast Reports Third Quarter Sales and Earnings

BRANTFORD, ONTARIO--(CCNMatthews - Oct. 31, 2006) - Wescast Industries Inc. (TSX:WCS.A) today reported 2006 third quarter sales of $84.8 million and a net loss of $1.4 million.

"The significant reductions in production volumes by the domestic Big 3 automakers during the quarter had a substantial impact on what is traditionally a soft quarter and further intensified the challenges that the industry has been addressing," said Ed Frackowiak, Wescast Chairman and CEO. "The aggressive actions we've taken in North America over the last eighteen months are addressing the changes within the domestic market, namely the impact of global competition on market pricing and the impact of high raw material prices on production costs. These actions, coupled with our strong revenue growth in Europe and our expansion into Asia, position the Company to face the challenges of the global market over the medium and longer term."

Highlights

- Consolidated sales were $84.8 million, down 3.2% from the $87.6 million reported in the same quarter last year, reflecting the decline in vehicle production levels reported by the domestic Big 3 and a corresponding reduction in light truck exhaust manifold shipments from the Company's North American operations. The impact of these factors was partially offset by a significant increase in the level of sales generated by the European operation during the quarter compared to last year.

- The Company reported a net loss for the quarter of $1.4 million compared with a net loss of $3.2 million reported in the third quarter of 2005.

- The net loss per share on a diluted basis was $0.11 for the quarter, compared with a net loss of $0.24 per share for the same period in 2005.

- The Company reported a significant year-over-year improvement in its European operation. A net loss of $0.7 million was reported for the third quarter compared to a net loss of $2.7 million reported for the third quarter of 2005.

- The North American automotive industry experienced an 11.1% decline in light vehicle production levels in the third quarter of 2006 compared to the third quarter of 2005. The domestic Big 3 automakers, the Company's primary North American customer base, experienced a more significant decline of 14.0% in their light vehicle production levels compared to the same period in 2005.

- During the third quarter, cash flows of $20.8 million generated from continuing operations enabled a net repayment of long-term debt of $9.7 million. The balance was applied to capital expenditures and dividend payments.

- The Company is continuing with the establishment of an integrated foundry and machining operation in China. The machining facility will begin production in 2007, followed by the foundry facility that is expected to commence operations in 2008. Several key individuals that will be part of the local management team for the operation have been recently hired and are currently receiving extensive training in Canada. These individuals will be heavily engaged in the establishment of the operations. During the quarter, the Company incurred $1.0 million of costs related to the establishment of the operation in China which are included in selling, general and administration expenses. Capital expenditures and equipment deposits totaling $5.6 million were also incurred during the third quarter.

Operations

Consolidated Sales

Total consolidated sales for the quarter were $84.8 million, a 3.2% decline from the $87.6 million generated during the third quarter of 2005. The consolidated sales are net of inter-segment sales of $2.7 million between the Company's European and North American business units. The sales analysis for the business units is presented based on gross sales.

Consolidated prototype and tooling sales in the third quarter were $1.8 million, down $0.6 million from the $2.4 million reported in 2005.

North American Sales

North American sales, excluding prototype and tooling sales, decreased by 9.6% to $67.7 million compared to $74.9 million reported in the third quarter of 2005. The Company experienced a quarter-over-quarter decline of 2.9% in unit casting sales volume in North America. Machining volumes were down 5.2% compared to 2005. The casting and machining unit volume and sales decline resulted from:

- The impact of market driven price reductions and changes in the product mix between light truck and car requirements compared to the third quarter of 2005;

- A reduction in light truck volume requirements of the domestic Big 3, due in part to high fuel prices and strong competition from the new domestic automakers; and,

- The impact of a change in product mix due to an increase in cast only volumes compared to the third quarter of 2005.

The factors above were partially offset by significantly increased volumes with
DaimlerChrysler, reflecting the additional content that Wescast was awarded for the minivan program. This additional volume was for a cast only program which generates lower sales dollars per part than cast and machined parts.

European Sales

Sales generated by the Company's operation in Hungary, excluding prototype and tooling sales, were up 74.8% to $18.0 million compared to $10.3 million during the third quarter of 2005. The European operation achieved a quarter-over-quarter increase in casting unit sales volume of 113.5% . Total units machined were 24.6% higher than the third quarter of 2005. The significant increase in unit volume resulted from the impact of several new programs that the operation launched in late 2005 and 2006, including programs transferred from the Company's North American operations and the increased volume on programs existing in 2005. The sales increase resulting from the increased volume was offset in part by a stronger Canadian dollar exchange rate and a change in product mix which resulted in a reduction in average selling prices. The majority of the volume increases were for cast only programs which, as previously mentioned, generate lower sales dollars per part than cast and machined parts.

Consolidated Earnings

The Company reported a net loss from continuing operations of $1.4 million for the quarter, an improvement compared to the $3.0 million net loss from continuing operations reported in the third quarter of 2005.

North American Earnings

The Company's North American operations reported a net loss of $0.3 million, consistent with the $0.2 million loss reported in 2005. The gross profit generated for the quarter was lower than the third quarter of 2005, but this decline was offset by significantly lower foreign exchange losses reported in 2006 compared to 2005.

The decline in gross profit from 2005 to 2006 was due mainly to:

- Lower casting and machining volumes;

- Market driven sales price reductions;

- Significant changes in product mix between light truck and car requirements; and,

- Lower prototype and tooling margins.

The impact of these factors was partially offset by the positive benefits from:

- The reduction in costs resulting from the implementation of the Company's foundry capacity optimization plan; specifically the closing of the Brantford foundry operations. All production activities at this facility were concluded immediately subsequent to the end of the second quarter;

- Lower raw material prices compared with 2005, specifically moly. This was partially offset by higher steel pricing compared to the third quarter of 2005;

- Lower accruals for severance expenses compared to 2005; and,

- Lower labour costs due to workforce restructuring completed in 2005.

European Earnings

The Company's European operations generated a net loss of $0.7 million compared to a net loss of $2.7 million generated in the third quarter of 2005. The improved profitability of the operation compared to last year was due mainly to increased casting volumes which provided better absorption of fixed costs. The positive impact from the volume increase was partially offset by changes in product mix due to more cast only parts sold compared to 2005, higher manufacturing scrap rates as the operation continues through the launch phase of new programs, electricity rate increases and higher payroll costs.

A more detailed discussion of the consolidated results for the quarter ended October 1, 2006 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 largest supplier of exhaust manifolds for passenger cars and light trucks. The Company designs, casts, machines and assembles high-quality engineered iron products for automotive original equipment manufacturers ("OEMs") and Tier 1 customers for the car and light truck markets in North America and Europe. The Company employs approximately 1,900 people in 6 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:

November 1, 2006 3:00 p.m. EST

To participate, please dial: North America 800-525-6384; International 780-409-1668 Conference ID# 7059531 (required)

Call back is available from November 1, 2006 to November 8, 2006, to access please dial 800-374-8789 (alternate: 402-220-0893) and enter pass code 7059531.



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

Three months ended Nine months ended
----------------------------------------------------------
October 1, October 2, October 1, October 2,
2006 2005 2006 2005
Restated Restated
(Note 8) (Note 8)
----------------------------------------------------------

Sales $84,825 $87,634 $286,312 $293,858
Cost of sales 76,818 78,612 248,111 251,438
----------------------------------------------------------

Gross profit 8,007 9,022 38,201 42,420
Selling, general
and administration 7,527 6,708 21,185 21,429
Stock-based
compensation - (7) 1 (40)
Research,
development and
design 1,522 1,340 4,585 4,236
----------------------------------------------------------
(1,042) 981 12,430 16,795
----------------------------------------------------------

Other (income)
expense
Interest expense 345 496 1,442 1,402
Restructuring
charge - - - 10,500
Investment
income (106) (44) (241) (94)
Other 353 2,655 (1,709) 2,524
----------------------------------------------------------
592 3,107 (508) 14,332
----------------------------------------------------------

Earnings (loss)
from continuing
operations before
income taxes (1,634) (2,126) 12,938 2,463
Income taxes (256) 864 4,996 3,783
----------------------------------------------------------
Earnings (loss)
from continuing
operations (1,378) (2,990) 7,942 (1,320)

Net loss from
discontinued
operations (21) (198) (369) (3,885)
----------------------------------------------------------

Net earnings
(loss) ($1,399) ($3,188) $7,573 ($5,205)
----------------------------------------------------------
----------------------------------------------------------

Earnings (loss)
from continuing
operations
per share
(Note 4)
- Basic and
diluted ($0.11) ($0.23) $0.61 ($0.10)
----------------------------------------------------------
----------------------------------------------------------

Net earnings
(loss) per share
(Note 4)
- Basic and
diluted ($0.11) ($0.24) $0.58 ($0.40)
----------------------------------------------------------
----------------------------------------------------------

Retained
earnings,
beginning of
period $264,604 $282,511 $257,206 $286,101
Net earnings
(loss) (1,399) (3,188) 7,573 (5,205)
Dividends paid (787) (787) (2,361) (2,360)
----------------------------------------------------------
Retained
earnings, end
of period $262,418 $278,536 $262,418 $278,536
----------------------------------------------------------
----------------------------------------------------------


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

As at
October 1, 2006 January 1, 2006
----------------------------------------

Assets
Current
Cash and cash equivalents $4,249 $1,944
Receivables 66,609 59,922
Income taxes receivable - 5,548
Inventories 29,467 39,626
Prepaids 3,543 1,834
Future income taxes 1,948 1,948
Current assets -
discontinued operations 98 145
----------------------------------------
105,914 110,967

Property, plant and equipment 269,332 288,458

Future income taxes 42,954 47,392

Other assets 1,726 732

Assets held for sale (Note 2) 4,308 -

Long-term assets -
discontinued operations 9,043 9,519
----------------------------------------
$433,277 $457,068
----------------------------------------
----------------------------------------

Liabilities and Shareholders'
Equity
Current
Payables and accruals $34,002 $36,825
Income taxes payable 2,021 -
Current portion of long-term debt 2,233 4,179
Current portion of stock
appreciation rights - 18
Future income taxes 72 72
Restructuring charge 52 918
Current liabilities -
discontinued operations - 102
----------------------------------------
38,380 42,114

Long-term debt 6,998 29,836

Deferred government assistance 2,706 2,229

Future income taxes 11,474 11,377

Employee benefits 18,652 16,641
----------------------------------------

78,210 102,197
----------------------------------------

Shareholders' Equity

Capital stock (Note 3) 110,762 110,647
Retained earnings 262,418 257,206
Share purchase loans (178) (225)
Cumulative translation
adjustment (17,935) (12,757)
----------------------------------------
355,067 354,871
----------------------------------------
$433,277 $457,068
----------------------------------------
----------------------------------------


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

Three months ended Nine months ended
----------------------------------------------------------
October 1, October 2, October 1, October 2,
2006 2005 2006 2005
Restated Restated
(Note 8) (Note 8)
----------------------------------------------------------

Cash derived from
(applied to)

Operating

Earnings (loss)
from continuing
operations ($1,378) ($2,990) $7,942 ($1,320)
Add (deduct) items
not affecting cash:
Depreciation and
amortization 9,218 9,108 28,544 28,711
Future income taxes 832 765 3,188 2,444
(Gain) loss on
disposal of
equipment 31 324 (68) 708
Deferred
government
assistance 42 (193) 477 41
Stock-based
compensation,
net of payments - (7) (18) (43)
Employee benefits,
net of payments 527 720 2,011 939
----------------------------------------------------------
9,272 7,727 42,076 31,480

Change in non-cash
operating working
capital (Note 5) 11,518 (5,944) 6,757 4,465
----------------------------------------------------------
20,790 1,783 48,833 35,945
Discontinued
operations 28 89 (239) (3,363)
----------------------------------------------------------
20,818 1,872 48,594 32,582
----------------------------------------------------------

Investing

Purchase of
property, plant
and equipment
and other assets (7,366) (9,945) (19,806) (17,003)
Deposits made on
equipment (1,456) - (1,456) -
Proceeds on
disposal
of equipment 32 10,898 1,495 11,194
Discontinued
operations - 499 175 1,545
----------------------------------------------------------
(8,790) 1,452 (19,592) (4,264)
----------------------------------------------------------

Financing
Issue of
long-term debt 8,895 15,429 20,386 41,573
Repayment of
long-term debt (18,576) (17,196) (44,797) (38,087)
Payment of
credit
facility fees - (63) - (74)
Payments under
capital lease
obligations (12) (95) (86) (324)
Issuance of
common shares 31 55 114 186
Employee share
purchase loan
repayments - 13 47 400
Dividends paid (787) (787) (2,361) (2,360)
Discontinued
operations - - - (31,426)
----------------------------------------------------------

(10,449) (2,644) (26,697) (30,112)
----------------------------------------------------------

Net increase
(decrease) in
cash and cash
equivalents 1,579 680 2,305 (1,794)

Cash and cash
equivalents
Beginning of
period 2,670 1,283 1,944 3,757
----------------------------------------------------------
End of period $4,249 $1,963 $4,249 $1,963
----------------------------------------------------------
----------------------------------------------------------

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 January 1, 2006 included in the Company's 2005 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 January 1, 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. Assets held for sale

During 2005, the Company executed its foundry optimization plan for its North American operations. As a result, the Company closed its foundry operation in Brantford, Ontario in July, 2006 after the transfer of the plant's production requirements to the Company's other facilities.

During the quarter the Company reclassified the Brantford foundry assets as held for sale. In the third quarter an orderly liquidation agreement was signed for the disposition of the equipment. Subsequent to the quarter end the land and building was listed for sale with a real estate company. The Company is anticipating that the Brantford foundry assets will be sold in the first half of 2007.



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")

October 1, 2006 January 1, 2006
---------------------------------
Issued and outstanding
5,748,892 Class A shares (2005 - 5,740,316) $98,335 $98,220

7,376,607 Class B shares (2005 - 7,376,607) 12,427 12,427
---------------------------------
$110,762 $110,647
---------------------------------
---------------------------------


Note 4. Earnings per share

Basic earnings (loss) per share from continuing operations and basic net earnings (loss) per share for the three months ended October 1, 2006 and October 2, 2005 are based on the weighted average common shares outstanding (2006 -- 13,110,479 shares; 2005 -- 13,097,112 shares). Diluted earnings (loss) per share from continuing operations and diluted net earnings (loss) per share for the three months ended October 1, 2006 and October 2, 2005 are based on the diluted weighted average common shares outstanding (2006 -- 13,125,355 shares; 2005 -- 13,117,393 shares).

Basic earnings (loss) per share from continuing operations and basic net earnings (loss) per share for the nine months ended October 1, 2006 and October 2, 2005 are based on the weighted average common shares outstanding (2006 -- 13,110,623 shares; 2005 -- 13,097,242 shares). Diluted earnings (loss) per share from continuing operations and diluted net earnings (loss) per share for the nine months ended October 1, 2006 and October 2, 2005 are based on the diluted weighted average common shares outstanding (2006 -- 13,125,499 shares; 2005 -- 13,117,578 shares).



Note 5. Consolidated statement of cash flows
The following is additional information to the statement of cash flows.

Change in non-cash
operating
working capital Three months ended Nine months ended
----------------------------------------------------------
October 1, October 2, October 1, October 2,
2006 2005 2006 2005
Restated Restated
(Note 8) (Note 8)
----------------------------------------------------------

Receivables $6,095 ($8,945) ($6,687) ($2,813)
Inventories 550 2,689 10,069 5,464
Prepaids (685) (724) (1,709) (662)
Payables and
accruals 257 6,179 (1,619) (8,129)
Restructuring
charge (351) (1,419) (866) 6,796
Income taxes
receivable/payable 5,652 (3,724) 7,569 3,809
----------------------------------------------------------
$11,518 ($5,944) $6,757 $4,465
----------------------------------------------------------


Note 6. Employee benefits

The Company's net benefit plan expense, which is recorded in cost of sales and selling, general and administrative expenses, is as follows:



Three months ended Nine months ended
-----------------------------------------------------
October 1, October 2, October 1, October 2,
2006 2005 2006 2005
-----------------------------------------------------

Pension benefit plan $616 $628 $1,848 $1,849
Other benefit plans 298 251 894 753
-----------------------------------------------------
$914 $879 $2,742 $2,602
-----------------------------------------------------


Note 7. 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 October 1, 2006
-------------------------------------
Inter-segment
North 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 $4,190 $ - $7,366


Three months ended October 2, 2005
-----------------------------------
Restated (Note 8)
------------------
Inter-segment
North America Europe Asia Eliminations Total
------------------------------------------------------

Sales to external
customers $77,122 $10,512 $ - $ - $87,634
Earnings (loss) from
continuing operations (247) (2,743) - - (2,990)
Investment income 44 - - - 44
Interest expense 496 - - - 496
Depreciation and
amortization 7,223 1,885 - - 9,108
Income taxes 844 20 - - 864
Purchase of property,
plant and equipment
and other assets $8,296 $1,649 $ - $ - $9,945

Nine months ended October 1, 2006
----------------------------------
Inter-segment
North 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 $4,190 $ - $19,806

Nine months ended October 2, 2005
---------------------------------
Restated (Note 8)
------------------
Inter-segment
North America Europe Asia Eliminations Total
------------------------------------------------------

Sales to external
customers $256,195 $37,663 $ - $ - $293,858
Earnings (loss)
from continuing
operations 6,567 (7,887) - - (1,320)
Investment income 94 - - - 94
Interest expense 1,402 - - - 1,402
Depreciation and
amortization 22,623 6,088 - - 28,711
Income taxes 3,725 58 - - 3,783
Purchase of property,
plant and equipment
and other assets $14,273 $2,730 $ - $ - $17,003

October 1, 2006
------------------
Discontinued
North America Europe Asia Operations Total
------------------------------------------------------
Total Assets $306,717 $109,547 $7,872 $9,141 $433,277

Property, plant
and equipment $181,518 $ 83,624 $4,190 $ - $269,332

---------------------------------------------------------------------------

January 1, 2006
-----------------
Discontinued
North America Europe Asia Operations Total
------------------------------------------------------
Total Assets $338,426 $108,978 $ - $9,664 $457,068
Property, plant
and equipment $200,920 $87,538 $ - $ - $288,458

---------------------------------------------------------------------------


Note 8. Comparative figures

Certain of the comparative figures within the statement of earnings and retained earnings and statement of cash flows have been restated to account for the Company's 49% interest in its' jointly controlled entity, United Machining Inc., under variable interest entity consolidation principles. This restatement resulted in an increase of $37 to the net loss that was previously reported for the three months ended October 2, 2005 and an increase of $369 to the net loss that was previously reported for the nine months ended October 2, 2005.

In addition, certain of the comparative figures have been reclassified to conform with the presentation adopted at October 1, 2006.



Management's Discussion and Analysis
Of Results of Operations and Financial Position
For the Three Months Ended October 1, 2006


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 October 1, 2006; the "Management's Discussion and Analysis" included in the Annual Report of Wescast for the year ended January 1, 2006; and with the consolidated financial statements and notes thereto for the year ended January 1, 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, 2006. 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 high-quality engineered iron products for automotive original equipment manufacturers ("OEMs") and Tier 1 customers for the car and light truck markets in North America and Europe. The Company employs approximately 1,900 people in 6 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 initial stages 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 largest supplier of 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 and Europe. The Company's powertrain operations in North America are well established and consist of 5 production facilities. The European powertrain operations are conducted through a production facility in Hungary, Wescast Hungary Zrt.

Asian Expansion

As part of Wescast's global strategy, the Company is establishing an integrated foundry and machining facility in Wuhan, Hubei Province, China. The Company will develop its presence in China in a staged fashion; first with the establishment of a machining facility that is expected to begin production in 2007, followed by a foundry facility that is expected to begin operating in 2008. Several key individuals that will form part of the local management team for the operation were recently hired and are currently receiving extensive training in Canada. These individuals will be heavily engaged in the establishment of the operation.

Current Market Conditions

North American light vehicle production volumes for the quarter totaled approximately 3.4 million units, an 11.1% decrease from the 3.8 million units produced for the same period in 2005. The Company's primary North American customer base, the domestic Big 3 automakers, experienced a more significant production decline of 14.0% over the same period in 2005.

Results from Operations

Consolidated Sales

Total consolidated sales for the quarter were $84.8 million, a 3.2% decline from the $87.6 million generated during the third quarter of 2005. The consolidated sales are net of inter-segment sales of $2.7 million between the Company's European and North American business units. The analysis of sales for the business units that follows is presented based on gross sales.

On a year-to-date basis, consolidated sales of $286.3 million were 2.6% lower than the $293.9 million reported during the first nine months of 2005. The decline is a result of lower casting and machining sales in North America, partially offset by a significant increase in sales generated by the Company's European operation.

Consolidated prototype and tooling sales in the third quarter were $1.8 million, down $0.6 million from the $2.4 million reported in 2005. On a year-to-date basis, consolidated prototype and tooling sales were $14.3 million, compared to $12.2 million reported in 2005.

North American Sales

North American sales, excluding prototype and tooling sales, decreased by 9.6% to $67.7 million compared to $74.9 million reported in the third quarter of 2005. The Company experienced a quarter-over-quarter decline of 2.9% in unit casting sales volume in North America. Machining volumes were down 5.2% compared to 2005. The casting and machining unit volume and sales decline resulted from:

- The impact of market driven price reductions and changes in the product mix between light truck and car requirements compared to the third quarter of 2005;

- A reduction in light truck volume requirements of the domestic Big 3, due in part to high fuel prices and strong competition from the new domestic automakers; and,

- The impact of a change in product mix due to an increase in cast only volumes compared to the third quarter of 2005.

The factors above were partially offset by significantly increased volumes with DaimlerChrysler, reflecting the additional content that Wescast was awarded for the minivan program. This additional volume was for a cast only program which generates lower sales dollars per part than cast and machined parts.

European Sales

Sales generated by the Company's operation in Hungary, excluding prototype and tooling sales, were up 74.8% to $18.0 million compared to $10.3 million during the third quarter of 2005. The European operation achieved a quarter-over-quarter increase in casting unit sales volume of 113.5%. Total units machined were 24.6% higher than the third quarter of 2005. The significant increase in unit volume resulted from the impact of several new programs that the operation launched in late 2005 and 2006, including programs transferred from the Company's North American operations and the increased volume on programs existing in 2005. The sales increase resulting from the increased volume was offset in part by a stronger Canadian dollar exchange rate and a change in product mix which resulted in a reduction in average selling prices. The majority of the volume increases were for cast only programs which, as previously mentioned, generate lower sales dollars per part than cast and machined parts.

Gross Profit

Consolidated gross profit for the quarter was $8.0 million, which represents a decline of 11.3% compared with the $9.0 million reported in the third quarter of 2005. The decline was due to several factors as follows:

- The North American operations generated lower gross profit due to the effects of:

- Market driven sales price reductions, significant changes in product mix between light truck and car requirements and the foreign exchange impact of a stronger Canadian dollar that in total reduced gross profit by $5.3 million compared with the third quarter of 2005;

- Lower casting and machining volumes that reduced gross profit by $3.3 million compared with the third quarter of 2005; and,

- Lower prototype and tooling margins.

These factors were partially offset by the positive benefits of the following:

- The reduction in costs resulting from the implementation of the Company's foundry capacity optimization plan; specifically the closing of the Brantford foundry operations. All production activities at this facility were concluded immediately subsequent to the end of the second quarter;

- Lower raw material prices compared with 2005, specifically moly. This was partially offset by higher steel pricing compared to the third quarter of 2005. The net quarter-over-quarter decrease in raw material costs was $1.5 million.

- Lower accruals for severance expenses compared to 2005; and,

- Lower labour costs due to workforce restructuring completed in 2005.

- The Company's European operation in Hungary generated significantly higher gross profit compared to 2005. The main factor for the significant improvement was increased casting volumes, offset in part by a change in product mix, which provided better absorption of fixed costs.

The positive impact from the volume increase was partially offset by higher manufacturing scrap rates as the operation continues through the launch phase of new programs, electricity rate increases and higher payroll costs.

On a year-to-date basis, the Company's gross profit of $38.2 million was down $4.2 million from the $42.4 million reported in the first nine months of 2005.

Selling, General and Administration

The Company's selling, general and administration expenses for the quarter were $7.5 million, up $0.8 million from the $6.7 million incurred in the same period in 2005. Included in these costs was depreciation of $0.8 million compared to $1.0 million in 2005. Excluding depreciation, the selling, general and administration expenses were $6.7 million, up $1.0 million compared to the third quarter of 2005. The majority of this increase was due to costs associated with the establishment of the Company's integrated foundry and machining facility in China, offset in part by lower payroll and severance costs compared to 2005. The Company incurred $1.0 million of expenses related to the establishment of the operation in China during the third quarter.

On a year-to-date basis, selling, general and administration expenses were $21.2 million, relatively consistent with the $21.4 million reported in the first nine months of 2005.

Research, Development and Design

The Company's research, development and design expenses were $1.5 million for the quarter, up $0.2 million from the $1.3 million reported in the third quarter of 2005. The increase was due mainly to higher payroll costs.

On a year-to-date basis, research, development and design expenses were $4.6 million, compared to $4.2 million reported in the first nine months of 2005.

Interest Expense

Interest expense, for the third quarter and on a year-to-date basis, was relatively consistent with the amounts reported in 2005.

Restructuring Charge

In the first quarter of 2005, the Company recorded a restructuring charge of $10.5 million or $6.9 million after tax related to the Company's foundry capacity optimization plan and the planned closure of its Brantford, Ontario foundry operations. The $10.5 million charge represented anticipated severance and other benefit costs associated with workforce reductions. There was no similar charge recorded in the first nine months of 2006. During the third quarter of 2006, payments of $0.35 million for severance and other benefit costs were made, reducing the restructuring accrual from $0.4 million at the end of the second quarter to $0.05 million at the end of the third quarter. The Brantford foundry has now been closed.

Other Income/Expenses

Other expense for the third quarter was $0.4 million, compared to other expense of $2.7 million reported in the same period last year. The majority of the significant decline in the level of other expenses was due to lower foreign exchange losses reported in 2006 compared to 2005. In the third quarter of 2005 the Company reported a net foreign exchange loss of $2.4 million primarily associated with the translation of foreign denominated future income tax assets. The foreign exchange translation impact associated with these assets was insignificant in the third quarter of 2006 as the Canadian dollar did not strengthen against the US dollar during the quarter. Also, the Company now uses forward contracts to manage the foreign exchange risk associated with the translation of these assets.

On a year-to-date basis, other income was $1.7 million compared to other expense of $2.5 million reported in the first nine months of 2005. The majority of this change was due to the differences in the level of foreign exchange gains and losses reported.

Income Taxes

The effective income tax recovery rate reflected for the quarter was 15.7%. The income tax recovery rate differs from the Canadian statutory federal and provincial income tax rate due mainly to no income tax benefit being recognized with respect to the loss generated by the Hungarian operation, and to a lesser extent, differences between Canadian and foreign income tax rates.

In the third quarter of 2005, the Company reported income tax expense of $0.9 million, even though a loss was reported during the quarter. The recognition of income tax expense in the third quarter of 2005 was due to no tax benefit being recognized with respect to the loss generated by the Hungarian operation and no tax impact associated with the significant foreign exchange loss reported, which was discussed under Other Income/Expenses.

Financial Condition, Liquidity and Financial Resources

At October 1, 2006 the Company had cash balances of $4.2 million and total debt of $9.2 million compared with cash balances of $1.9 million and total debt of $34.0 million at the end of 2005.

Operating Activities

The Company generated $20.8 million in cash from continuing operations during the third quarter, compared with $1.8 million in cash generated during the third quarter of 2005. The significant increase was primarily attributable to reduced investment in non-cash working capital. In the third quarter of 2006, receivables are lower due to the collection of tooling receivables while in the third quarter of 2005 receivables were negatively impacted by the timing of a significant customer payment. Income taxes receivable are lower this quarter due to the receipt of tax refunds during the quarter. The change in payables and accruals compared to the same period last year was down due to increased accruals for severance expenses last year.

On a year-to-date basis, the Company has generated $48.8 million in cash from continuing operations compared with $35.9 million generated in 2005.

Investing Activities

Capital expenditures for the third quarter were $7.4 million, which were $2.6 million lower than the $9.9 million incurred over the same quarter last year. The major expenditures incurred during the quarter related to the construction of the China facility. Construction costs and deposits on equipment incurred during the third quarter totaled $5.6 million.

On a year-to-date basis, capital expenditures were $19.8 million compared to $17.0 million in 2005.

Financing Activities

Net repayments of long-term debt during the quarter totaled $9.7 million compared to $1.8 million in the third quarter of 2005. 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 multi-year committed borrowing facility. During the quarter the Company voluntarily reduced the total committed credit available from $125.0 million to $90.0 million. The reduction of the available credit will result in reduced standby fees. Based on the current drawings under the facility and certain financial covenants that the Company must satisfy, approximately $82.7 million of unused credit is currently available to the Company.

Shareholders' Equity

Shareholders' equity at the end of the third quarter was $355.1 million, an increase of $0.2 million from the $354.9 million at January 1, 2006. Net earnings generated during the first nine months of 2006 increased shareholders' equity by $7.6 million. Year-to-date dividends of $2.4 million or $0.18 per share have been paid on the Class A and Class B shares. The cumulative translation adjustment account decreased by $5.2 million during the first nine months of 2006. The cumulative translation adjustment account represents 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 in the cumulative translation adjustment account during the first nine months of 2006 has 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

Current industry estimates project 2006 light vehicle production levels in North America will be approximately 15.1 million vehicles, down 4.4% from the level experienced in 2005. The market share of the domestic Big 3, the Company's primary customer base, declined by 4% in North America in the first nine months of 2006 compared with 2005. The Company anticipates that its production volumes in North America in 2006 will not reach the levels achieved in 2005, a result of the lower production levels projected for its primary customer base, the impact of North American programs transferred to its European operation, and the impact of volumes previously awarded to offshore competitors. The Company expects that its production volumes in Europe will be significantly higher than 2005 due to recent product launches and the impact of programs transferred from North America.

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. This price pressure combined with the impact of new global price benchmarks being established by competitors located in low-cost countries has resulted in an overall reduction in average selling prices. This pressure is expected to continue.

The Company's results are sensitive to raw material prices for scrap steel and moly. The Company expects its average scrap steel price for 2006 to be higher than the average experienced in 2005. The price of moly was at near record highs in 2005, but was down in the first three quarters of 2006 relative to 2005. The Company expects further declines in the price of moly from the levels experienced in 2005.

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 leading 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 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 early in the third quarter. The Company expects that the implementation of its foundry optimization plan will significantly reduce its fixed costs. A portion of these fixed cost reductions was realized in the first nine months of 2006. With the completion of the Brantford foundry closure, further cost reductions are expected to be realized during the remainder of 2006.

- The Company will continue to focus on expanding its powertrain business through the expansion of its customer base and geographic coverage. This includes completing the foundry and machining ramp-up of the operation in Hungary. The successful completion of the ramp-up is expected to generate significant improvements in Wescast's results in 2006.

- 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.

- The Company's planned expansion into Asia is well underway. Construction of an integrated foundry and machining operation in Wuhan, Hubei Province, China began during the quarter. Machining operations are expected to begin during the first quarter of 2007, while the foundry is anticipated to be operational during the first quarter of 2008. Key technical and operational resources have been hired and training is in progress. 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 the focus on these areas is the best means to ensure the long-term success of the 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.

Contact Information

  • Wescast Industries Inc.
    Mr. David Dean
    Vice President, Finance
    (519) 750-0000
    Website: www.wescast.com