Wescast Continues To Show Strong Third Quarter Results Despite The Market Downturn
BRANTFORD, Ontario--Oct. 23, 2001--Wescast Industries Inc. continues to show strong third quarter earnings."Despite the slowing economic trends and the catastrophic events of September 11 in the U.S. we are very pleased with our financial results in the third quarter," says Ray Finnie, President and CEO. "Through the hard work and efforts of our people, we were able to realize significant operating improvements that resulted in our margins improving in spite of the lower volumes."
Highlights
| -- | Market conditions continued to deteriorate during the quarter with an overall North American production decline of 12.5% relative to the same period last year. The year over year decline for the Big 3 was 15%. |
| -- | Wescast continued to increase market share to the range of 70% of the Big 3, from 60% a year ago. This helped to offset the impact of the poor market, limiting the year over year decline in units shipped during the third quarter to only 3%. |
| -- | Core operations remained very profitable despite decreased volumes and increased capacity. Gross margin, before depreciation, at 38.5% for the third quarter remains strong and is comparable to the same quarter last year. |
| -- | Net earnings from continuing operations for the third quarter 2001 at $12.2 million were down from the $14.1 million for the third quarter of 2000. Fully dilute earnings per share from continuing operations, were $0.93 compared to $1.06 in 2000. Return on equity was 18.4%. |
| -- | The Company announced the decision to transfer production of its stainless steel manifold programs to other suppliers. Accordingly, this business segment is being accounted for as a discontinued operation. A provision of $31.5 million, pre-tax, to write the assets down to net realizable value and to cover the losses of the operations to closure was made in the quarter. In addition, the appropriate financial statement re-classifications have been made and prior periods restated. Net loss, including discontinued operations, was ($9.8) million or ($0.76) per share, fully diluted, for the quarter. |
Operations
Total sales for the quarter at $87.9 million were down 8.4% from the previous quarter's level of $96.0 million. Sales generated from cast and machined iron manifolds decreased 6.4% to $78.8 million from $84.2 million in 2000. A portion of this decrease reflects the lower volume attributable to the month of September, which we estimate to be in the range of $5 million.
Tooling, prototype and other sales at $9.1 million for the third quarter, were below the $11.8 million recorded in the third quarter of 2000.
Operating earnings for the third quarter were $16.2 million, versus the $20.5 million earned for the same period in 2000. The comparison with the previous year should consider the following factors:
-- Iron manifold gross margin before depreciation at 38.5%
exceeds the same quarter last year at 37.4%. Through
continuous improvement efforts in our plants Wescast has been
able to maintain margins despite the downward pricing pressure
from the Big 3, a fluctuating market and inflationary
pressures on wages, hydro and other costs.
-- A 17%, or $4.7 million decline in the September sales volume
linked to the tragic events of September 11.
-- Higher selling, general and administrative costs primarily
related to expanding the reach of our global sales network. In
addition, the company has made a provision of $1.1 million for
potentially non-collectable accounts receivable reflecting the
impact of the economic downturn on some of our Tier 1
customers.
-- Higher research and development costs to enhance our products'
technical and competitive advantage.
Other income and expenses for the third quarter 2001 showed other income of $2.1 million, compared to income of $0.7 million for the third quarter of 2000. The other income for the quarter was attributable to foreign exchange gains on net working capital resulting from the weakening Canadian dollar.
Net earnings from continuing operations were $12.2 million or $0.93 per share fully diluted for the third quarter, compared to $14.1 million for the same quarter last year or $1.06 per share fully diluted.
Cash Flow
Operating cash flow was $32.2 million for the quarter compared to $7.6 million in 2000. The increase was mainly attributable to a significant positive change in non-cash operating working capital compared to 2000. This is a function of more stable volumes relative to the comparable period and improved accounts receivable collections. Also, in 2000, as a result of increased market share, there was a significant investment made in tooling receivables, trade receivables and inventory. This investment had a negative impact on operating cash flow for the third quarter in 2000.
Capital expenditures for the third quarter were $13.0 million, compared to $7.8 million for the same quarter last year.
The Company has deferred $0.7 million of pre-production costs for the third quarter, and $2.5 million on a year-to-date basis at its Weslin facility.
Balance Sheet and Financial Position
At September 30, 2001, the Company had $85.5 million in cash, short-term investments and long-term bond investments compared to $64.4 million at the end of 2000. Wescast continues to maintain a strong financial position to support future growth and competitive advantage.
The following table provides an overview of the above-mentioned highlights for the third quarter:
Wescast Industries Inc.
Q3 2001 Highlights
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in millions of dollars,
except per share data and
where otherwise noted
Q3 Q3 % YTD 01 YTD 00 %
2001 2000 change change
--------------------------------------------------------------------
Sales 87.9 96.0 -8% 289.5 300.6 -4%
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Earnings from
continuing
operations 12.2 14.1 -13% 49.5 54.5 -9%
--------------------------------------------------------------------
Loss from
discontinued
operations (22.0) (0.3) 7233% (24.8) (0.3) 8167%
--------------------------------------------------------------------
Net Earnings (9.8) 13.8 -171% 24.7 54.2 -54%
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Earnings from
continuing
operations per share
basic 0.94 1.08 -13% 3.84 4.14 -7%
fully diluted 0.93 1.06 -12% 3.76 4.07 -8%
--------------------------------------------------------------------
Net earnings (loss)
per share
basic (0.75) 1.06 -171% 1.92 4.12 -53%
fully diluted (0.76) 1.03 -174% 1.87 4.05 -54%
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Sales Breakdown -
dollars (net of
pre-production
deferrals)
Casting & Machining 78.8 84.2 -6% 273.6 270.1 1%
Cast 56.4 60.1 -6% 196.8 201.5 -2%
Internal Machining 21.8 23.2 -6% 74.9 66.3 13%
External Machining 0.6 0.9 -33% 1.9 2.3 -17%
Tooling & prototype 9.1 11.8 -23% 15.9 30.5 -48%
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Sales Breakdown -
units (000's)
Ductile iron 0.3 0.4 -25% 0.9 1.5 -40%
SiMO iron 2.9 2.9 0% 10.1 9.6 5%
Total 3.2 3.3 -3% 11.0 11.1 -1%
Sales Breakdown -
percentage
SiMo Penetration 90.6% 87.9% 91.8% 86.5%
Internal Machining
Penetration 59.9% 69.9% 60.3% 62.5%
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Gross Margin (before
depreciation) 31.8 33.2 -4% 116.2 115.8 0%
Iron manifolds 30.3 31.5 -4% 111.9 110.2 2%
Tooling, prototypes
& other 1.5 1.7 -12% 4.3 5.6 -23%
--------------------------------------------------------------------
Gross Margin %
(before
depreciation) 36.1% 34.5% 40.1% 38.5%
Iron manifolds 38.5% 37.4% 40.9% 40.8%
Tooling, prototypes
& other 16.1% 14.3% 27.2% 18.4%
--------------------------------------------------------------------
Gross Margin (after
depreciation) 25.9 27.6 -6% 98.2 101.8 -4%
Iron manifolds 24.4 25.9 -6% 93.9 96.2 -2%
Tooling, prototypes
& other 1.5 1.7 -12% 4.3 5.6 -23%
--------------------------------------------------------------------
Gross Margin %
(after depreciation) 29.3% 28.7% 33.9% 33.9%
Iron manifolds 30.9% 30.7% 34.3% 35.6%
Tooling, prototypes
& other 16.1% 14.3% 27.2% 18.4%
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Depreciation and
amortization
Depreciation and
amortization- cost
of sales 5.9 5.6 5% 18.0 14.0 29%
Depreciation -
SG & A 0.9 0.7 29% 2.4 2.0 20%
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Capital Expenditures 13.0 7.7 69% 41.5 29.3 42%
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R&D 1.7 1.0 70% 5.0 2.8 79%
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SG & A (% of sales) 9.1% 6.3% 7.2% 5.9%
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Tax Rate 35.5% 35.1% 34.9% 35.7%
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Wescast Industries Inc. is the world's largest supplier of cast exhaust manifolds for passenger cars and light trucks. The Company designs, develops, casts, and machines high-quality iron exhaust manifolds for automotive OEMs. Wescast operates seven production facilities in North America, and three sales and design offices in North America and Europe. The Company is recognized world wide for its quality products, innovative design solutions, and highly committed workforce. Wescast trades under the TSE symbol WCS.A as well as the NASDAQ symbol of WCST.
Advisory
Certain information regarding the Company set forth in this document, including management's assessment of the Company's future plans and operations, may constitute forward-looking statements under applicable securities law and necessarily involve risks associated with the automotive industry, production, marketing, and transportation such as loss of market, volatility of prices, currency fluctuations, environmental risks, competition from other producers and ability to access sufficient capital from internal and external sources; as a consequence, actual results may differ materially from those anticipated in the forward-looking statements.
A conference call has been arranged for:
October 23, 2001
3:00 p.m. EST
To participate, please dial (416) 620-5683
Wescast Industries Inc.
Consolidated Statement of Earnings and Retained Earnings
(in thousands of Canadian dollars,
except per share amounts) (Unaudited Canadian GAAP)
Three months ended Nine months ended
----------------------------------------------------
September 30, October 1, September 30, October 1,
2001 2000 2001 2000
(Restated (Restated
Note 13) Note 13)
----------------------------------------------------
Sales $87,924 $96,021 $289,485 $300,580
Cost of sales 62,077 68,463 191,301 198,770
--------------------------------------------------
Gross margin 25,847 27,558 98,184 101,810
Selling, general
and
administration 7,971 6,070 20,773 17,812
Research,
development
and design 1,706 1,036 5,006 2,721
--------------------------------------------------
Operating
earnings 16,170 20,452 72,405 81,277
Other (income)
expense
Interest expense 86 134 318 362
Investment
income (784) (702) (2,591) (2,599)
Other (income)
and expenses
(Note 8) (2,069) (678) (1,331) (1,162)
--------------------------------------------------
Earnings from
continuing
operations before
income taxes 18,937 21,698 76,009 84,676
Income Taxes 6,741 7,620 26,501 30,193
--------------------------------------------------
Earnings from
continuing
operations 12,196 14,078 49,508 54,483
Results of
discontinued
operations
(Note 11) (21,968) (324) (24,768) (302)
--------------------------------------------------
Net earnings
(loss) ($9,772) $13,754 $24,740 $54,181
--------------------------------------------------
--------------------------------------------------
Earnings from
continuing
operations
per share
(Note 9)
- basic $0.94 $1.08 $3.84 $4.14
--------------------------------------------------
--------------------------------------------------
- fully diluted $0.93 $1.06 $3.76 $4.07
--------------------------------------------------
--------------------------------------------------
Net earnings
(loss) per
share (Note 9)
- basic ($0.75) $1.06 $1.92 $4.12
--------------------------------------------------
--------------------------------------------------
- fully diluted ($0.76) $1.03 $1.87 $4.05
--------------------------------------------------
--------------------------------------------------
Retained earnings,
beginning of
period $269,281 $223,102 $238,052 $188,983
Net earnings (loss) (9,772) 13,754 24,740 54,181
Dividends paid (1,557) (1,578) (4,649) (4,756)
Excess of cost
over assigned
value of Class
A common shares
purchased and
cancelled 0 (4,789) (191) (7,919)
--------------------------------------------------
Retained earnings,
end of period $257,952 $230,489 $257,952 $230,489
--------------------------------------------------
--------------------------------------------------
Wescast Industries Inc.
Consolidated Balance Sheet
(in thousands of Canadian dollars) (Unaudited Canadian GAAP)
As at
------------------------------
September 30, December 31,
2001 2000
------------------------------
Current assets
Cash and cash equivalents $55,997 $34,428
Short-term investments 13,818 30,000
Receivables 57,346 60,590
Inventories 22,101 20,602
Prepaids 1,727 1,291
Current Assets - discontinued
operations (Note 11) 4,712 4,469
------------------------------
155,701 151,380
Property and equipment (Note 4) 245,332 224,162
Other (Note 5) 27,315 10,208
Long-term assets - discontinued
operations (Note 11) 12,057 23,627
------------------------------
$440,405 $409,377
------------------------------
------------------------------
Current liabilities
Payables and accruals $38,246 $35,002
Income taxes payable 5,695 260
Current portion of long-term debt 2,790 4,001
Current liabilities - discontinued
operations (Note 11) 11,983 2,151
------------------------------
58,714 41,414
Long-term debt 4,505 4,622
Future income taxes 5,577 15,306
Employee benefits 7,255 6,661
------------------------------
76,051 68,003
------------------------------
Shareholders' equity
Capital stock (Note 7) 106,469 103,334
Retained earnings 257,952 238,052
Cumulative translation adjustment (67) (12)
------------------------------
364,354 341,374
------------------------------
$440,405 $409,377
------------------------------
------------------------------
Wescast Industries Inc.
Consolidated Statement of Cash Flows
(in thousands of Canadian dollars) (Unaudited Canadian GAAP)
Three months ended Nine months ended
----------------------------------------------------
September 30, October 1, September 30, October 1,
2001 2000 2001 2000
(Restated (Restated
Note 13) Note 13)
----------------------------------------------------
Cash derived
from (applied to)
Operating
Earnings from
continuing
operations $12,196 $14,078 $49,508 $54,483
Add (deduct) items
not requiring
cash:
Depreciation and
amortization 6,872 6,353 20,380 15,946
Amortization of
bond costs 67 5 74 9
Future income
taxes 248 607 921 2,602
Loss on disposal
of equipment 79 277 1,273 346
Employee
benefits 486 334 1,407 1,003
---------------------- ----------------------
19,948 21,654 73,563 74,389
Change in
non-cash working
capital (Note 10) 11,985 (14,060) 7,710 (34,188)
---------------------- ----------------------
31,933 7,594 81,273 40,201
Discontinued
operations
(Note 11) 219 3 (2,714) 468
---------------------- ----------------------
32,152 7,597 78,559 40,669
---------------------- ----------------------
Financing
Issue of
long-term debt 264 210 809 2,229
Repayment of
long-term debt (262) (795) (2,238) (1,873)
Payment of
obligations under
capital lease (175) (264) (562) (618)
Employee
benefits paid (470) (138) (813) (388)
Issuance of share
capital under
Employee Share
Purchase Plan 120 126 437 469
Employee share
loan repayments 95 114 435 157
Issuance of share
capital under
Stock Option
Plan 882 358 2,055 405
Repurchase of
common shares 0 (8,059) (340) (13,130)
Dividends paid (1,557) (1,578) (4,649) (4,756)
---------------------- ----------------------
(1,103) (10,026) (4,866) (17,505)
---------------------- ----------------------
Investing
Purchase of
property,
equipment and
other assets (13,017) (7,766) (41,534) (29,299)
Purchase of
investments (29,575) (30,000) (29,575) (30,000)
Restricted cash
from long-term
debt 0 0 0 378
Deferred
pre-production
costs (729) (420) (2,477) (4,625)
Redemption of
short-term
investments 0 0 30,000 34,209
Proceeds on
disposal of
equipment 11 152 25 267
Discontinued
operations
(Note 11) (1,203) (872) (8,563) (9,608)
---------------------- ----------------------
(44,513) (38,906) (52,124) (38,678)
---------------------- ----------------------
Net increase
(decrease) in
cash and cash
equivalents (13,464) (41,335) 21,569 (15,514)
Cash and cash
equivalents
Beginning of
period 69,461 68,985 34,428 43,164
---------------------- ----------------------
End of period $55,997 $27,650 $55,997 $27,650
---------------------- ----------------------
---------------------- ----------------------
Wescast Industries Inc.
Notes to the Consolidated Financial Statements (in thousands of Canadian dollars, except per share amounts) (Unaudited Canadian GAAP)
Note 1. Basis of presentation
The disclosures in these interim financial statements do not conform in all respects to the requirements of generally accepted accounting principles for annual financial statements. These interim financial statements should be read in conjunction with the most recent annual financial statements for the year ended December 31, 2000.
Note 2. Accounting policies
These interim financial statements follow the same accounting policies and methods of their application as the most recent annual financial statements except for:
The Company changed its accounting policy with respect to the computation of earnings per share to that issued by the Canadian Institute of Chartered Accountants in December 2000. The main effect of the change to the Company's financial statements is in the calculation of fully diluted earnings per share, which is now calculated using the treasury stock method instead of the imputed interest method. This change in accounting policy has been applied on a retroactive basis and the comparative numbers have been restated accordingly. The effect of this change for the quarter and the nine month period ended October 1, 2000 is an increase of $0.01 and $0.11 respectively, to fully diluted earnings per share.
Note 3. Interest in jointly controlled entities
The following is the company's proportionate share of the major components of its jointly controlled entities (before eliminations):
September 30, December 31,
2001 2000
-------------------------------------------------------------------
Balance Sheet
Current assets $18,744 $15,193
Long-term assets 42,931 15,731
Current liabilities 15,815 19,848
Long-term liabilities 3,870 3,681
Equity 41,990 7,395
-------------------------------------------------------------------
-------------------------------------------------------------------
Three months ended Nine months ended Year ended
September 30, September 30, December 31,
2001 2001 2000
----------------------------------------------
Statement of earnings
Sales 5,802 13,087 16,794
Cost of sales and expenses 6,280 13,737 17,723
Net loss (478) (650) (929)
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-------------------------------------------------------------------
Three months ended Nine months ended Year ended
September 30, September 30, December 31,
2001 2001 2000
----------------------------------------------
Statement of cash flows
Cash derived from
(applied to)
Cash flows from operating
activities (2,319) (2,858) 335
Cash flows from financing
activities 8,412 33,940 11,208
Cash flows from investing
activities ($7,362) ($27,705) ($11,211)
Note 4. Property and Equipment
September 30, December 31,
2001 2000
---------------------------
Cost
Land $4,912 $3,150
Buildings and improvements 108,794 98,732
Machinery, equipment and vehicles 264,489 237,182
---------------------------
378,195 339,064
---------------------------
Accumulated Depreciation
Buildings and improvements 13,925 11,224
Machinery, equipment and vehicles 118,938 103,678
---------------------------
132,863 114,902
---------------------------
Net Book Value
Land 4,912 3,150
Buildings and improvements 94,869 87,508
Machinery, equipment and vehicles 145,551 133,504
---------------------------
$245,332 $224,162
---------------------------
---------------------------
Note 5. Other Assets
September 30, December 31,
2001 2000
---------------------------
Deferred pre-production costs $9,382 $7,976
Director and employee share purchase
plan loans 1,728 2,078
Bond issue costs 76 86
Licence 62 68
Long-term bond investments 15,692 0
Deferred foreign exchange loss 375 0
---------------------------
$27,315 $10,208
---------------------------
---------------------------
Note 6. Scientific Research and Experimental Development (SR & ED) Credits
On June 20, 2001 the Company filed SR & ED claims for the years 1999 and 2000 with a total net estimated tax benefit for the Company of $5,658 or $3,677 after tax. $1,152 of this amount was recorded in the fiscal 2000 Income Statement. As these claims are subject to audit by the taxation authorities the Company has recorded an additional $2,903 (pre-tax) of the net benefit this quarter leaving $1,603 (pre-tax), for recognition in future periods subject to audit.
The net benefit this quarter was recorded as a $1,702 reduction of cost of sales and research and development and design and a $1,201 reduction of capital assets and deferred pre-production costs.
Note 7. Capital Stock
Authorized
Unlimited Preference shares, no par value
Unlimited Class A subordinate voting common shares, no par value
9,000,000 Class B multiple voting common shares, no par value
September 30, December 31,
2001 2000
---------------------------
Issued and outstanding
5,573,097 Class A Common Shares
(2000 - 5,383,749) $93,958 $90,755
7,426,607 Class B Common shares
(2000 - 7,466,907) 12,511 12,579
-------------------------------------------------------------------
$106,469 $103,334
-------------------------------------------------------------------
-------------------------------------------------------------------
During the quarter, 40,300 Class B common shares were converted
into 40,300 Class A common shares.
Note 8. Other (income) and expenses
Three months ended Nine months ended
September 30, October 1, September 30, October 1,
2001 2000 2001 2000
--------------------------------------------------------------------
Foreign exchange
translation (gain) loss ($1,961) ($678) ($2,272) ($1,162)
(Gain) Loss on disposal
of equipment and other (108) 941 0
--------------------------------------------------------------------
($2,069) ($678) ($1,331) ($1,162)
--------------------------------------------------------------------
--------------------------------------------------------------------
Note 9. Earnings per common share
Earnings from continuing operations per share and basic earnings per share are calculated based on the weighted average number of shares outstanding (2001 - 12,986,501 shares; 2000 - 13,070,037 shares). Fully diluted earnings from continuing operations per share and net earnings per share are calculated based on the fully diluted weighted average number of common shares outstanding (2001 - 13,241,815 shares; 2000 - 13,291,884 shares).
Note 10. Consolidated statement of cash flows
The following is additional information to the statement of cash flows.
Change in non-working capital.
Three months ended Nine months ended
-------------------------------------------------
September 30, October 1, September 30, October 1,
2001 2000 2001 2000
-------------------------------------------------
Receivables $7,886 ($7,351) $3,953 ($24,324)
Inventories 2,108 2,016 (4,486) (7,073)
Prepaids (981) 93 (436) (214)
Payables and accruals 413 (8,040) 3,244 (3,880)
Income taxes payable 2,559 (778) 5,435 1,303
-------------------------------------------------
$11,985 ($14,060) $7,710 ($34,188)
-------------------------------------------------
Note 11. Discontinued Operations
On September 13, 2001 the Board of Directors approved a plan to shut down the Company's stainless steel manifold business and transfer current programs to other manufacturers by June 30, 2002. The related manufacturing assets will either be disposed of, utilized in other operating facilities or used for research and development by June 30, 2002.
The results from discontinued operations have been reported separately within these interim financial statements. Prior year comparative amounts have also been reclassified.
Summarized financial information for the discontinued operations are as follows:
Three months ended Nine months ended
-------------------------------------------------
September 30, October 1, September 30, October 1,
2001 2000 2001 2000
--------------------------------------------------------------------
Sales $1,563 $762 $7,257 $4,069
--------------------------------------------------------------------
--------------------------------------------------------------------
Results from discontinued
operations
(1) Results of operations
prior to September
13, 2001 ($1,810) ($499) ($6,060) ($463)
Income Tax Recovery 618 175 2,068 161
-------------------------------------------------
(1,192) (324) (3,992) (302)
-------------------------------------------------
(2) Net loss from
discontinued operations (31,536) 0 (31,536) 0
Income Tax Recovery 10,760 0 10,760 0
-------------------------------------------------
(20,776) 0 (20,776) 0
-------------------------------------------------
Results of discontinued
operations ($21,968) ($324) ($24,768) ($302)
--------------------------------------------------------------------
--------------------------------------------------------------------
Net assets of discontinued operations
September 30, December 31,
2001 2000
---------------------------
Current assets $4,712 $4,469
Property and equipment 12,057 19,233
Deferred pre-production costs 0 4,394
---------------------------
Total assets 16,769 28,096
Current liabilities 11,983 2,151
---------------------------
Net assets $4,786 $25,945
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Note 12. Financial Instruments
Foreign exchange contracts
Beginning in the third quarter of 2001, revenues generated from one of the Big 3 auto manufactures were received in Canadian dollars as opposed to U.S. dollars. Existing open sales contracts denominated in U.S. dollars will be converted into Canadian dollars at an average exchange rate of $1.525. Future sales contracts will be negotiated in Canadian dollars.
The Company effectively ceased hedging certain U.S. future dollar receipts associated with this customer during the second quarter. The net loss of $641 on reversing previous hedges has been deferred and will be offset against revenue at the time that the originally hedged transactions occur.
Note 13. Comparative figures
The Company has restated sales and cost of sales for the quarter ended October 1, 2000. Sales, amounting to $3,669 for the quarter or $7,005 on a year-to-date basis, earned during the pre-production periods of new facilities have been offset against cost of sales. There is no effect on net earnings for the quarter and year-to-date ended October 1, 2000.
In 2000, the Company accrued certain annual expenses on a pro-rated basis quarterly throughout the year. The comparative figures have been restated to reflect the actual expenses incurred for the quarter ended October 1, 2000. The effect on the quarter and year-to-date ended October 1, 2000 is an increase in net earnings of $261 or $0.02 per share and $1,770 or $0.14 per share, respectively, on a basic and fully diluted basis.
The company has reclassified certain comparative amounts to report discontinued operations. There was no effect on net earnings for the quarter and year to date ended October 1, 2000.